China’s shadow lenders: Here’s how one is thriving

Leslie Shaffer | Writer for
Shadow lender: Inefficiency is China's top problem

China's spate of shadow banking defaults has spurred concerns over the credit worthiness of the entire segment, but some players appear to be prospering.

"We have not lost even one dime," said Raymond Ting, executive director of Hong Kong-listed Credit China. "We will always get our principal and interest back eventually."

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Shadow banking, or high-yield lending that largely takes place off banks' balance sheets, has come under scrutiny for its association with trust and wealth management products which invested in risky assets, some of which have no revenue.

But Ting said his business is thriving, because in some ways, shadow bankers resemble loan sharks.

"We charge very high interest" for loans of short duration, he said. Credit China typically charges 3-3.5 percent a month to lend funds for three to six months.

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Frederic J. Brown | AFP | Getty Images

"The problem with China is actually the inefficiency of the banking system," he said. "If the banking system [were] good enough in China, we would not be there. We are there because there is a demand," he said.

Amid rising concerns about bad loans, authorities in China have been cracking down on the amount of credit available to sectors suffering from overcapacity, such as coal and property. In addition, China's larger banks typically prioritize lending to larger companies and state-owned enterprises, leaving many smaller businesses out in the cold when it comes to access to financing.

"All these people have a problem with their liquidity because they don't have a proper financing channel. Just now, they don't get any finance from official channels," Ting said.

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To be sure, Credit China is offering tough terms for access to credit, typically requiring collateral and keeping loan-to-value ratios low, often around 30 percent.

Ting noted one client, a property developer with around 500 million renminbi (around $80.6 million) in collateral, was only given a 50 million renminbi loan. If loans are not repaid, the collateral is auctioned off as part of the legal process.

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Difficulties with repayment appear to have risen. With capital-deprived developers facing a tough market, the overdue ratio of Credit China's total loan book rose by 4 percentage points to 14 percent by the second half of last year, HSBC said in a note last month.

The company has also stepped into internet finance, one of the newer shadow banking segments. China's internet giants, including Alibaba, have been offering money market investments at rates much higher than the around 3 percent benchmark time-deposit rates.

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Credit China is planning to offer internet housing loans via Centaline branches in China, with second mortgages offering yields of around 13 percent.

HSBC sees risks to the new business, especially as second mortgages would appear to contradict government measures aimed at cooling the property market, which target buyers of second or third homes.

It is also concerned about the potential for repayment risks.

"The credit approval procedure is likely centered around the collateral instead of the use of proceeds, which increases the probability of borrower's mis-using the fund without any risk control," HSBC said.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter