“Mr. Joe Zhang’s book is part memoir of his time as chairman of microfinance company Wansui Micro Credit in Guangzhou, and part reflection on the need for financial reform in China. While much of what has been written about China’s financial system tends to take a sweeping overview, Mr. Zhang’s account is refreshingly anecdotal, providing a unique insight into the creative and sometimes sketchy ways finance works in China on a local level.”
You say in the book that Chinese people look down on microfinance providers. Why is that?
Because of the official brainwashing in the past six decades that private-sector financing is sneaky, dangerous and disruptive to the existing system, and that high interest rates are immoral. They totally disregard the fact that we deal with subprime customers where risks are higher and costs are higher. We as a business need to make adequate returns. Or we will not exist. It is as simple as that.
The title of your book flags that changes in China’s financial system might be sowing the seeds of the next subprime crisis. How might that crisis play out, and is shadow banking a cause or a symptom?
I find shadow banking assets are very safe in general. We manage our own money very carefully. Given the tough regulation, we are not able to take too much risk even if we want to. But the rapid growth of shadow banking reflects on the failure of the much bigger formal banking system. For six decades, financial repression in China takes the form of regulated interest rates being significantly below inflation. That leads to rapid credit growth. Banks are forced to increase loans rapidly year after year. But sensible lending opportunities are not growing that fast. Therefore, banks are forced to lower lending standards, leading to growth of their own subprime lending. Of course, low interest rates send false signals about the viability of loans.
How does microfinance in China differ from the model made famous by Grameen Bank founder Muhammad Yunus?
Microfinance in China is subject to widespread prejudice, and unbelievably tough regulations. We would be far better off without a license. Kerbmarket lenders have more flexibility and higher efficiency. Compared to India and Bangladesh, our average loan size is far bigger.
You’ve long been active as a champion of microfinance in Chinese. What inspired you to write this book in English?
I find that much of the debate among foreign investors and academics misses the point. They mistakenly focus on the asset quality of shadow banking, and the risks shadow banking poses to the whole financial system. But these two issues are not important in my view. I ask people to focus on the message the rapid growth of shadow banking sends to us. Why is shadow banking growing so rapidly despite a hostile set of regulations? What does it say about the monetary policy?
One last reason: I find Chinese policies are increasingly influenced by foreign investors, academics and the Hong Kong investment community. I want to influence the influential.
You say that the biggest hurdle for microfinance in China is opposition from regulators. Does that mean microfinance is doomed? What needs to happen for microfinance to really take off?
The Chinese regulators are not alone in discriminating against microfinance firms. Other government departments, the banks and the public are equally unfriendly. China needs a cultural revolution on many things including this issue. I am doing a bit of educational work. I am proud to play this role as a citizen.
If China does face the risk of having its own subprime crisis, where do you think the weakest points in China’s financial system are?
I see the real estate bubble as the most likely starting point of the crisis, followed by local government fund-raising platforms.
You note that China’s money supply has expanded significantly more in recent years than that of the U.S. Is this something we need to worry about? Given that China’s monthly consumer price index numbers remain so low, why hasn’t it fed into inflation?
In itself, China’s money supply growth being much faster than those in other countries is not a worry. But at 16-17% year after year, monetary policy in China is very accommodative and inflationary. Credit growth and inflation reinforce each other, becoming a vicious circle. That is a pattern for three decades now. We have reached a point where the public has become very sick of it.
China’s regulators regularly exhort the country’s banks to lend more to small and medium-sized firms. Is it fair to assume that banks can fix the credit drought that small firms in China have long had to deal with?
Big banks have a different cost structure and a naturally bureaucratic decision-making process that is not suitable for small loans, despite political pressure and their best intentions. That’s not their fault. If you put me in the shoes of a bank president, I would do exactly what they do. They have their daily imperatives to deal with. But division of labor is a wonderful thing. Microfinance firms are born to serve SMEs. The government and the public just need to give them a longer leash. They will do the job well.
Joe Zhang is the Chairman of Slow Bull Capital based in Hong Kong, and also author of “Inside China’s Shadow Banking: The Next Subprime Crisis” and 避開股市的地雷。Zhang was Chairman of Wansui Micro Credit Company in Guangzhou, China, from 2011 to 2012, . He was named “Microcredit Person of the Year” in January 2012 by the Microcredit Association of China.
He started Slow Bull Capital in 2012. Before starting his own business, Zhang worked at investment banks. He was Deputy Head of China Investment Banking at UBS between 2008-11. From 1999 to 2006, Joe was co-head and head of China Research at UBS Securities Asia Limited. Prior to this, Mr. Zhang worked at the People’s Bank of China between 1986 and 1989. Zhang was chief operating officer of Shenzhen Investment (604 HK), a company listed on the Hong Kong Stock Exchange, between 2006-08.
Zhang is a frequent speaker at investor conferences. He also writes extensively about China economy, and banking. His work has appeared in The Wall Street Journal, Financial Times, International Herald Tribune, and The New York Times.