Insights and commentary on current issues affecting SMBs. Sponsored by Parr LLC.
May 12, 2013 Leave a comment
SMB Tech Meet & Greet: JM Freuler of Funding Gates, Receivables Management Software (via http://www.Firmology.com)
Firmology’s SMB Tech Meet & Greet series takes an inside look at the technology available to small business owners, straight from the founders the built them. Name: JM FreulerTitle: Co-FounderCompany Name: Funding GatesCompany One Liner: Receivables management software for small businessesLocation…
March 4, 2013 1 Comment
By Bruce Nussbaum 
Here’s a shocking truth: Occupy Wall Street and the Tea Party actually agree on something. They both hate crony capitalism, and they both love Steve Jobs. If this sounds freaky, let me add another weird fact: Practically all my students at the New School in New York, where I teach a course on creativity and capitalism, want to start their own companies. The New School is renown for being a bastion of lefty thought, going back to the 1930s and ’40s. My students want to be entrepreneurs. They want to be Kickstarter, kickass entrepreneurs. These students want to belong to what I call Indie Capitalism.
I use the term Indie deliberately to reflect a new economy that shares many of the distributive and social structures of the independent music scene—and the value system as well. Indie bands are hyperlocal, and Indie Capitalism is a post-global, local economic phenom (think 3D printing, locavore eating, and crowdfunding new products). Indie capitalists are über-urban, too, feeding off the cultural/entrepreneurial energy of cities—New York, Portland, Chicago, Detroit, San Francisco, Los Angeles, Seattle, Austin. And they are, of course, super-participative. Indie Capitalists believe in our making of all things, with no clear boundaries between consumer and producer, investor and shopper. We are all of them.
There are many Indie Capitalists already among us. Alice Waters’s groundbreaking organic restaurant Chez Panisse has served as a model for the “source-local” food movement. Blue Marble Ice Cream, “Made in Brooklyn,” uses only local New York State cow milk and hires folks from the neighborhood. Chrysler Group tapped into the Indie culture when it hired Wieden + Kennedy to come up with the “Imported from Detroit” ad, with a song by Detroit-born Eminem.
My favorite Indie Capitalist is entrepreneur Elon Musk, the co-founder of PayPal (EBAY). He’s handcrafting Falcon rockets and Dragon capsules to take people and cargo to the International Space Station—and even to Mars. His company SpaceX integrates creativity, creation, and capitalism. So does his other company,Tesla Motors (TSLA), which is assembling and selling all-electric sports cars and four-door sedans out of an old California factory.
Indie Capitalism has three foundational principles:
• Creativity generates economic value. Creativity is the source of profit. Yes, efficiency can squeeze more out of what exists, but creativity gives us originality, which translates into a market advantage and big margins.
• Creativity drives capitalism. These past few years we have been victimized by the disastrous results of “creativity” applied to the financial sector (mortgage-backed securities, for starters). What we lost sight of is that the scaling of creativity to actually make things of value sold in the marketplace is the true heart of our economic system. It is the true generator of net new jobs, wealth, and tax revenue.
• Creative destruction is crucial to economic growth. Crony capitalism, which relies on monopoly and political power, is antithetical to entrepreneurial capitalism. A faster cycle of birth, growth, and death of companies boosts creativity, economic value, and growth.
The contours of Indie Capitalism are only just coming into view. They will change over time, as my students and millions of others build this new economic system. But in the reconnecting of creativity to capitalism, we have something to look forward to.
February 16, 2013 Leave a comment
Continued from the previous post…
8. Learn to sell – this is a must-have skillset, whether you have someone in charge of sales or not… The good news, even if you’re not born with the gift of gap, you can become better by continually getting in front of prospects and practicing your pitch. While I do not believe in entrepreneurs pitching vaporware but if you don’t believe in your products and services, it’s impossible to convince others to believe in them (you can read between the lines)…
9. Redefine failure – when you have your own business, often the highs are so high and the lows are so low. But even on their gloomiest days, successful entrepreneurs feel a compulsion to make sure that failure isn’t the end of their story. It’s OK to fall down nine times, just make sure that you get back up the 10th time.
10. Don’t be in it just for the money – a tricky statement¸ since most entrepreneurs I know are red-blooded capitalists like me. But as an old saying goes, money is a great motivator, not an end-all be-all. Successful entrepreneurs are driven by desire to accomplish meaningful things while embracing it as a way of life. Jobs once asked Sculley (back then a senior exec at Pepsi) when trying to convince him to join Apple, “do you want to spend the rest of your life selling sugar water or change the world?” Sculley came on board as the CEO of Apple (only to get fired later but that’s for another post).
While writing this 3-part post, I found myself reflecting on my own current endeavors. Am I following the rules myself and doing everything I can to ensure their success? What’s your answer?
February 5, 2013 1 Comment
Many household names in the corporate world got their start during economic downturn. In 2009 at the depth of the worst business climate in decades, Americans started nearly 7MM new businesses. Most of them will fail, but some will succeed. Bill Murphy Jr., author of The Intelligent Entrepreneur, wrote about the 10 rules of entrepreneur success. As simple as they sound, there’s lots of wisdom in these rules…
September 27, 2012 Leave a comment
It’s a known fact that small and medium sized business failures have continued to increase over the past three years. Some businesses are failing in the first three to five years. It can’t just be bad luck that causes so many companies to lose ground permanently. Below are some of the biggest reasons small and medium businesses don’t survive.
To have a successful business, planning and innovation is required. The amount of pre-planning that must be done before a business starts up can be exhausting but necessary. A good business ownerwill have a good methodical and systematic approach to ensure business goals are implemented and met. Smaller companies often fail at this step. They tend to start right off without a future plan and end up far from where they expected.
Avoid Technology
Technology can enhance a business in so many ways. Small and medium sized businesses can take advantage of automated accounting, internet, e-purchasing and sending e-catalogs to their current and potential customers. When a business fails to see how important technology is in their day to day business, they won’t be able to keep up with the market demands or business goals. Businesses that don’t take advantage of things such as SEOand PPC won’t be able to stay up to date with their competition. This can lead to little or no sales.
Lack of Funds
September 19, 2012 Leave a comment
Tips for Funding Medium-Sized Businesses in Today’s Environment
When running a business, one of the biggest problems many have right now, is obtaining funding. In the past, money has been much easier to borrow, but with current economic conditions, easy funding is gone. Businesses borrow money for any number of reasons including to hire employees or open up new locations. In reality, a lot of businesses of any size falter because of the lack of adequate funding. Here, are 5 tips for obtaining funding for medium-sized businesses in today’s environment.
Venture Capital
When running a medium sized business, one needs to determine how much they are willing to give up in regards to control. Venture capital money is usually obtained for higher risk, higher reward companies. This is an excellent way to get a serious amount of money to take a business to the next level. The downside with venture capital is; they end up owning a portion of the business. Oftentimes, they even want to control aspects of the day to day operations. Venture capital money can be used to start up a company, or to expand operations or ideas.
Traditional Banks
By the time a business is medium-sized, they will no doubt, have a banking relationship. Even though, receiving funding is difficult, an established business can still get money. Banks are exceedingly strict when giving out loans, so be prepared to have financial statements on hand. A business that over the long term has made money will have no problem qualifying for a loan. Establishing a banking relationship with a local bank is a terrific idea for a business owner.
SBA-Guaranteed Loan
Image via CrunchBase
If a bank will not loan money, there are other options. One is through the SBA guaranteed loan program. There are SBA district offices all over the country where one can fill out a loan application. The people at the SBA will be able to assist one in filling out the application. Many medium sized businesses can get more consideration if they are hiring new workers or in a certain industry. The small business association can help one qualify for the maximum amount of money.
Angel Investor
If a business is viable and profitable, an angel investor may be able to assist. Like borrowing from a bank, one needs a solid plan for what they plan to do with the money. One would need to have financial statements and proof of profits to have a serious chance of receiving funding. Angel investors are different from venture capitalists in that an angel investor does not seek to run the operations of a company.
Sell Stock
A company that is seeking funding, can also sell a portion of their company. This is a way to gain funding, while still controlling the company. This is a way a business can get a large amount of money, to really fund operations needed for growth. Stock can even be sold to employees who are confident in the companies operations.
Anyone looking to obtain funding for their business needs to be prepared. Financial statements and a serious business plan are needed. This is because anyone giving out a loan wants to be sure they are dealing with a legitimate business. When obtaining funding, a business has an excellent opportunity to take expand exponentially.
Skylar Rickman writes about business, finance & more at www.creditreport.org.
September 18, 2012 Leave a comment
Roosevelt Institute Senior Fellow; author, ‘Age of Greed’
Central Banks are Saving Democracy From Itself
The Federal Reserve‘s recent announcement of aggressive new policies is more than a little welcome. It involved a new round of quantitative easing focused on mortgage-backed securities, but more importantly, a statement that the Fed would keep rates low for a long time, even if the unemployment rate begins to fall markedly. In other words, the Fed will be more tolerant of rising inflation. A couple of points are clear and have been widely discussed:
First, more inflation is what this economy needs. It will reduce “real” interest rates down the road. It will also reduce the level of debt, which will now be paid off in somewhat inflated dollars. Lenders will pay the price; borrowers will benefit.
Second, the Fed is at last accepting its dual mandate, which is not only to keep inflation in check but also to keep unemployment in check as well. Inflation got almost all the focus since Paul Volcker‘s reign in the early 1980s.
Third, inflation targeting as almost the sole purpose of any government policy is now either not applicable to current circumstances or never really was the answer to our prayers. The main claimant on the uses of either hard or soft inflation targeting was none other than Ben Bernanke himself. He was the champion of the Great Moderation, which held that less GDP volatility and low inflation were admirable ends in themselves — proof of a nearly perfectly managed economy.
Never mind that growth in the late 1990s was supported by high-tech speculation in the stock market, or that growth in the early 2000s was supported by a housing bubble and crazy, risky practices on Wall Street. And forget that job growth was the worst of the postwar period under George W. Bush, even before the 2008 recession, and wages had been performing poorly for 30 years. It was all really great, said Bernanke, and only a few mainstream economists disagreed.
But there is another point that needs emphasis and is being passed over. This one is about democracy. Bernanke is acting aggressively because the American Congress and president are locked in an austerity embrace. Fiscal stimulus is now turning into de-stimulus. Even the president’s budget calls for fiscal restraint. The deficit bugaboo is strangling the world.
Those who want to make the Fed more subject to democratic control — and to a degree, I am sympathetic — should heed a lesson here. Democracy — that is, a democratically elected Congress and president — is choosing a damaging course of austerity. In Europe, it is far worse.
Needed policies are coming from America’s central bank, which was deliberately created as an independent entity. Note that it is Romney who is saying he wants Bernanke out of there and crying wolf about inflation. Bernanke, not subject to the whims of democracy, has had the courage to change his own thinking. He knows the consequences of tight policy now.
So what do we do? We should be a little modest about the universal benefits of democracy. For example, I think democracy may yet work to end the severest levels of austerity in Europe. People are mad. Governments are changing for the better. Democracy in America is the only answer to an ever-richer and more powerful oligarchic class in the U.S., which wants to lower taxes, limit regulations, and cut government into ever smaller pieces.
But we must also deal with the disturbing fact that one of the least democratic of our institutions, the Fed, is the only one saving the day now. The same is true in Europe, where the European Central Bank is now acting intelligently, in contrast to the fiscal hawks dominated by the German policymakers and apparently supported by a majority of the German people. This issue is not simple.
Cross-posted from Rediscovering Government.
September 12, 2012 Leave a comment
CEO and co-CIO, PIMCO
Central Banks’ “Responsible Irresponsibility”?
Many monetary policy purists will not recognize what central banks in Europe and the United States are up to these days. And those that do are likely to express outrage at how far these traditional guardians of monetary stability have ventured into unfamiliar territory — a situation they undoubtedly regard as inadvisable, if not dangerous.
Such reactions are understandable. Yet confusion and outrage are not the right responses for the rest of us. Whether you are a government, an investor or a concerned citizen — and whether you live in the west or in an emerging economy such as Brazil — it is important to understand why both the European Central Bank and the US Federal Reserve are so far adrift from conventional central banking; and what this means for the global economy as a whole, and for individual countries.
Like fiscal agencies, central bankers responded aggressively to the calamity of the 2008 global financial crisis. Eager to avoid an economic depression, they slashed interest rates, opened all sorts of emergency financing windows to keep banks alive, and also injected liquidity into the economy through whatever avenue they could think of.
From the very beginning, the intention was for this unusual policy activism to be both temporary and reversible. Indeed, much time and effort were devoted to designing “exit strategies” that allow central banks to return to “normalcy” in an orderly and timely fashion.
Yet there has been no exiting. Instead, central bankers have found themselves drawn deeper — much deeper — into experimental mode.
With ultra-low interest rates proving insufficient to deal with the economic malaise, the Federal Reserve has felt compelled to provide unprecedented “forward policy guidance.” It signaled its strong expectation that rates would remain floored at zero until at least the end of 2014. And by claiming that it could see that far into the future, it essentially challenged the time-tested view that monetary policy acts with “long and variable lags.”
This was not the only unthinkable. The Federal Reserve has aggressively bought US government and mortgage securities. On the other side of the Atlantic ocean, the ECB has acquired trillions of bonds issued by struggling members of the Eurozone; and it has even found a back door to get money to the Greek government in order for it to meet its debt obligations to the ECB.
The numbers are getting very large; especially as both central banks have signaled their intention to do more (including last Thursday’s ECB announcement). Already, the ECB has ballooned its balance sheet to over 30 percent of GDP and the Federal Reserve to 20 percent of GDP. (Note that the Bank of England and the bank of Japan are in the same ballpark).
Through their ever-larger presence in markets, central banks have inevitably influenced liquidity, price signals and information content. In some cases, even the provision of financial services to the public has been impacted (including money market saving instruments, pensions and life insurance).
Imagine if this were attempted by central banks elsewhere. It would be met in the west by cries of irresponsibility. Yet, ironically — and using a formulation adopted by economists such as Paul Krugman and Paul McCulley — central bankers in Europe and the U.S. have felt that it is in fact responsible for them to be irresponsible.
Central bankers will tell you that they have had no choice but to operate increasingly in unfamiliar and unconventional policy territory. After all, despite massive monetary (and fiscal) stimulus, the US economy has remained sluggish and unemployment is still way too high. Meanwhile, Europe continues to struggle with a debt crisis that started in Greece in 2009 and has spread wide and far. Even Germany, the continent’s powerhouse and the country that has undertaken the deepest structural reforms, is now slowing markedly.
Due to political paralysis and polarization, central bankers seem to be the only policymakers both willing and able to respond to these unusual challenges. Yes they are using imperfect tools. Yes the outcomes of their actions involve collateral damage and unintended consequences. But they see all this as preferable to the alternative of doing nothing.
I suspect that central bankers, whether in Europe or the U.S., realize that — acting by themselves — they cannot deliver the much-needed outcomes of growth, jobs and financial stability. Rather than guarantee the destination, they are helping to define the journey. They are building bridges, hoping to buy time for politicians and other policymaking entities to overcome their bickering and dithering.
Time will tell whether this strategy will work. In the meantime, the rest of the world has no choice but to adapt to this “responsible irresponsibility.”
The more western central banks inject liquidity into their economies, the greater the splash for other countries. The result is something that has been experienced by countries such as Brazil: significantly greater exchange rate volatility, disruptive flows of capital, and higher tensions between domestic and external realities.
Brazil and other responsive emerging countries have responded by re-caliberating their macroeconomic policy mix. They have aggressively cut interest rates while tightening fiscal policy; and they are looking to revamp structural reforms.
It is still early days though. Further policy adjustments will be required in the months and years ahead as western central banks implement additional unconventional policies, and as the longer-term effects become more visible. And it will not be easy. Policy responses will be analytically hard to calibrate precisely, especially as all this is happening with virtually no global policy coordination to speak of.
Have no doubt. While most countries would prefer to be just observers, they are in fact reluctant participants in one of the biggest monetary policy experiments of all time. The entire world shares an interest in the success of this unprecedented endeavor — after all Europe and the United States anchor today’s international monetary system and will do so for quite awhile. Yet in hoping for success, we are all well advised to also think of the range of contingency steps to deal with the collateral damage and the unintended consequences.
This article was originally published in Portuguese in Brazil’s Estado de Sao Paulo.
July 26, 2012 Leave a comment
Submitted by Tyler Durden.
Who is Sandy Weill? He is none other than a retired Citigroup Chairman, a former NY Fed Director, and a “philanthropist.” He is also the man who lobbied for overturning of Glass Steagall in the last years of the 20th century, whose repeal permitted the merger of Travelers of Citibank, in the process creating Citigroup, the largest of the TBTF banks eventually bailed out by taxpayers. In his memoir Weill brags that he and Republican Senator Phil Gramm joked that it should have been called the Weill-Gramm-Leach-Bliley Act. Informally, some dubbed it “the Citigroup Authorization Act.” As The Nation explains, “Weill was instrumental in getting then-President BillClinton to sign off on the Republican-sponsored legislation that upended the sensible restraints on financecapital that had worked splendidly since the Great Depression.” Of course, by overturning Glass Steagall the last hindrance to ushering in the TBTF juggernaut and the Greenspan Put, followed by the global Bernanke put, was removed, in the process making the terminal collapse of the US financial system inevitable. Why is Weill relevant? Because in a statement that simply redefines hypocrisy, the same individual had the temerity to appear on selloutvision, and tell his fawning CNBC hosts that it is “time to break up the big banks.” That’s right:the person who benefited the most of all from the repeal of Glass Steagall is now calling for its return.
Hypocrisy defined 5:20 into the interview below:
I am suggesting that [big banks] be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable… I want us to be a leader… I think the world changes and the world we live in now is different from the world we lived in ten years ago.
How ironic is it then that at the signing ceremony of the Gramm-Leach-Bliley, aka the Glass Steagall repeal act, Clinton presented Weill with one of the pens he used to “fine-tune” Glass-Steagall out of existence, proclaiming, “Today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority.”
How ironic indeed. And how hypocritical for this person to have the temerity to show himself in public, let alone demand the law he ushered in, be undone.
Weill discussing all of the above and more with a straight face here:
For those curious to learn a bit more about Weill, here is some good reading:
Weill is the Wall Street hustler who led the successful lobbying to reverse the Glass-Steagall law, which long had been a barrier between investment and commercial banks. That 1999 reversal permitted the merger of Travelers and Citibank, thereby creating Citigroup as the largest of the “too big to fail” banks eventually bailed out by taxpayers. Weill was instrumental in getting then-President Bill Clinton to sign off on the Republican-sponsored legislation that upended the sensible restraints on finance capital that had worked splendidly since the Great Depression.
Those restrictions were initially flouted when Weill, then CEO of Travelers, which contained a major investment banking division, decided to merge the company with Citibank, a commercial bank headed by John S. Reed. The merger had actually been arranged before the enabling legislation became law, and it was granted a temporary waiver by Alan Greenspan’s Federal Reserve. The night before the announcement of the merger, as Wall Street Journal reporter Monica Langley writes in her book “Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World… and Then Nearly Lost It All,” a buoyant Weill suggested to Reed, “We should call Clinton.” On a Sunday night Weill had no trouble getting through to the president and informed him of the merger, which violated existing law. After hanging up, Weill boasted to Reed, “We just made the president of the United States an insider.”
The fix was in to repeal Glass-Steagall, as The New York Times celebrated in a 1998 article: “…the announcement on Monday of a giant merger of Citicorp and Travelers Group not only altered the financial landscape of banking, it also changed the political landscape in Washington…. Indeed, within 24 hours of the deal’s announcement, lobbyists for insurers, banks and Wall Street firms were huddling with Congressional banking committee staff members to fine-tune a measure that would update the 1933 Glass-Steagall Act separating commercial banking from Wall Street and insurance, to make it more politically acceptable to more members of Congress.”
At the signing ceremony Clinton presented Weill with one of the pens he used to “fine-tune” Glass-Steagall out of existence, proclaiming, “Today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority.” What a jerk.
Although Weill has shown not the slightest remorse, Reed has had the honesty to acknowledge that the elimination of Glass-Steagall was a disaster: “I would compartmentalize the industry for the same reason you compartmentalize ships,” he told Bloomberg News. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking, you’d have consumer banking separate from trading bonds and equity.”
Instead, all such compartmentalization was ended when Clinton signed the Gramm-Leach-Bliley Act in late 1999. In his memoir Weill brags that he and Republican Senator Phil Gramm joked that it should have been called the Weill-Gramm-Leach-Bliley Act. Informally, some dubbed it “the Citigroup Authorization Act.”
Gramm left the Senate to become a top executive at the Swiss-based UBS bank, which like Citigroup ran into deep trouble. Leach—former Republican Representative James Leach—was appointed by President Barack Obama in 2009 to head the National Endowment for the Humanities, where his banking skills could serve the needs of intellectuals. Robert Rubin, the Clinton administration treasury secretary who helped push through the Citigroup Authorization Act, was the most blatant double dealer of all: He accepted a $15-million-a-year offer from Weill to join Citigroup, where he eventually helped run the corporation into the ground.
Citigroup went on to be a major purveyor of toxic mortgage–based securities that required $45 billion in direct government investment and a $300 billion guarantee of its bad assets in order to avoid bankruptcy.
Weill himself bailed out shortly before the crash. His retirement from what was then the world’s largest financial conglomerate was chronicled in the New York Times under the headline “Laughing All the Way From the Bank.” The article told of “an enormous wooden plaque” in the bank’s headquarters that featured a likeness of Weill with the inscription “The Man Who Shattered Glass-Steagall.”
June 25, 2012 Leave a comment
The Unknown Risks of China’s Trusts, published by Also Sprach Analyst
Over the past many months, we have been talking (on and off) about the growing size and risks of the shadow banking in China. The market started to become aware of the risks of the unknown shadow banking system last year when some companies’ bosses started running away from the creditors, particularly in Wenzhou. While the focus has been shifted away from all these underground lending, the problem is not going away.
The so-called “trust” in China is yet another component in the Chinese shadow banking system. The size of the trust industry in terms of assets has reached RMB5 trillion and counting. In the past few years, one of the major sources of funding for trusts has been banks’ depositors. These trusts products offered higher returns than bank deposits (e.g. 10%), thus they appeared to be very attractive, especially when bank deposits have been hugely negative in real term thanks to high inflation, making these trust products a popular destination for bank depositors who want better returns than bank deposits (this has allegedly been one of the causes of the deposit flights, but we would leave the problem for now). Trust companies then take the money raised from banks and invest in stuff that they think can offer high return. The problem is where to invest to generate high return. In a certain sense, this is not very far off from securitisation.
As many real estate companies last year were pushed into desperate situations when the government tightened monetary and credit policy, the real estate industry turned out to be a popular destination for trust companies’ investment as demand for funding from real estate companies meant that these companies were willing to accept high costs of funding. According to this report, real estate accounts for 14.83% of total trust industry’s investment. Both equity and debt investments are common. Of course, these investments can only be fine as long as the real estate market is growing with prices and sales going up, which is not happening.
Moneyweek (via Sina) has a story on one of the major trust companies: China Credit Trust, a trust company with some RMB200 billion of assets. Earlier, this trust company has already been questioned on the investments in real estate sector. As early as 2010, this trust company has invested in a real estate company which ended up being unable to repay the debt. But the real estate market is not the only source of risks for trusts, of course. As in other trust companies, banks helped to distribute the products, thus depositors would invest in the trust products. In the case of this particular trust product by China Credit Trust, it took money from banks’ depositors with interest rates at 9.5-11%. ICBC is the custodian bank.
One of the products raised a total of roughly RMB3 billion, and the money raised is then invested in the equity capital of an energy company in Shanxi, which is a family business. The investment will reach maturity on 31 Jan 2014. However, despite the fact that this was an energy company which produces coal, it turns out that the company was then involved in shadow banking lending itself. In this case, they appeared to have become a loan shark themselves. But they are themselves deeply indebted, and perhaps they have borrowed quite a lot of money from the shadow banking channel as well. Thus in last year, creditors came to demand repayment. Now the bosses of the companies are said to be “under control” by the police, while the debt outstanding amount to RMB5 billion. The company in question might well be insolvent. In any case, this investment is gone.
For those depositors who have bought into this sort of products, the risks are obvious. As the economy slows, the probability that those money cannot be repaid would increase, not to mention that investors in these products have no idea if the one who got funding from their investments are of good credit, or whether these companies are performing fraudulent practices, etc. As far as we understand, banks do not offer guarantee to depositors for these products (although those who bought into these schemes seem to have been led to believe that there is guarantee), thus it will be interesting to see what will happen if more and more problems emerge from the trust sector of the shadow banking system.
And importantly, banks themselves are partnering with trusts to provide lending to companies without being reported in their books as lending. Few months ago the 21st Century Business Herald reported that banks have been using the partnership with trust companies to provide lending to companies. On banks’ books, as a result, they are not described as loans, but probably as equity interest in trusts. As a result of such trickery, these loans are not subject to the same regulation and scrutiny as other loans. The report put the size of such scheme at RMB100 billion, and that’s the figure for the year of 2012 till March.
With the slowing economy being worse than most have expected, and given how China banks decide who to lend to, it should come as no surprise that quite a portion of the outstanding debts through this channel will go bad, while the equity investments through this channel will be wiped off. The size of the industry in terms of assets is roughly at 10% of China’s annual GDP in 2011. Incidentally, the size of subprime mortgage market was estimated at US$1.3 trillion on March 2007, which is, incidentally, more or less at 10% of US annual GDP in 2006. That is not to say that this is subprime for China. Rather, the point is that even though “10% of GDP” does not look large, that could present significant systemic risks thanks to the interconnectedness within the financial system that we may not fully understand yet. So beware of a potential ticking time bomb here that may or may not explode.
For more news and analysis, visit Also sprach Analyst. Follow us on Twitter and Facebook.
Shadow Banking System Causes Apprehension (theepochtimes.com)
Time to Panic: Today’s China Looks Scarily Like 2006 America (theatlantic.com)
Deloitte Shadow Banking Index – ‘Only’ $9.53 Trillion in Size at End of 2011 (bespacific.com)
Events In This Chinese City Show Just How Bad China’s Slowdown Could Get (businessinsider.com)
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