Changing China

Chinese banking regulators should monitor more closely the lending activities of underground banks, where interest rates react more quickly to changing economic conditions than do rigid state-set interest rates.

“Historically, these interest rates change more rapidly to changes in market liquidity,” Gao Shanwen, Essence Securities’ chief economist, said at the Reuters China Investment Summit.

“They are an important barometer that should be monitored more closely,” he said.

According to market lore, some of these illegal banks are formed by bank employees or others with access to bank funds, which are then lent outside of official channels, said Gao.

Such banks flourish along China’s east coast, where there are a multitude of private firms that need cash to run their operations but have traditionally been shunned by the country’s large state-run banks, which prefer making loans to large state-run firms.

Monitoring the illegal lending, which plays an important role in China’s largely state-run banking system, would be relatively easy, because there are established brokers, who regularly advertise their services through mass distribution of cell phone alerts.

Photo Caption: Gao Shanwen, chief economist at Essence Securities, speaking at the Reuters China Investment Summit in Beijing. REUTERS/Christina Hu