Chinese for investors

24 September 2013 By John Foley

China’s rapidly expanding system has coined a wealth of new terms, and given new meanings to some old ones. Breakingviews presents a glossary for the curious financial tourist.

Asset Management Company- 基金管理公司

Companies set up in 1999 with public funds to suck over $300 billion of bad loans from the Chinese banking system. Now they are moving towards initial public offerings, having been repurposed to suck capital from foreign institutional investors instead.

Bad bank-坏银行

In the West, the portfolio of loans excised from a bank that has lent too recklessly. In the eyes of China’s economic planners, the name for a bank that hasn’t lent recklessly enough.

Chinese Communist Party-中国共产党

China’s ruling party. The effective regulator, borrower, investor, credit officer, human resources department and lender of last resort for the entire banking system.

Discounted bill – 票据贴现

An IOU issued by a bank to a company on behalf of its customer, and cashed in by the recipient at another bank. Traditionally a means of facilitating trade, more recently used as off balance-sheet credit to facilitate speculation and keep troubled companies alive.

Entrusted loan – 委托贷款

A loan made from one company to another, with a traditional lender acting as middleman and taking a fee. An innovation that has effectively enabled any cashed-up company to act as a bank.

Fees- 手续费

The best alternative source of income for banks as regulators gradually remove the caps on deposit rates and minimum rates on loans that guaranteed banks a healthy interest margin. Fees at smaller banks are growing by as much as 60 percent year on year.

Guarantee company- 担保公司

One of over 20,000 companies which receive a fee for guaranteeing loans and bonds from companies who may otherwise be unable to borrow. China’s answer to the Western bond insurer.

Housing- 房子

A convenient store of value and – for many years – a source of tremendous capital gain in China. To remain so, in the popular imagination, it must under no circumstances be lived in.

Interbank market- 银行间市场

A market for banks and other financial institutions to offer and obtain short-term liquidity, but used by some to boost earnings or lending capacity. Rates in June reached 25 percent – four times what many state-owned companies pay for loans.

Japan- 日本

A cautionary tale.

Karl Marx- 卡尔马克思

Noted Western economist whose name is often cited by Chinese leaders and is written into the country’s constitution. Despite this, China has spent thirty years ignoring his warning that capitalism leads to social calamity.

Local government financing vehicle- 地方政府融资平台

A vehicle that allows governments to get around rules that prevent them from borrowing or issuing bonds. LGFVs are the recipients of 9.3 trillion yuan ($1.5 trillion) of lending, according to official estimates. Who pays if one goes bad is unclear – which for now suits all parties.

Micro-finance-小额信贷

Loosely regulated lending for small, private companies ignored by large banks. Often decried by regulators and officials. Like bacteria on which a host depends for survival, but about which that host would rather not think too deeply.

Non-performing loans- 不良贷款

Debts that have gone bad – currently about 1 percent of banks’ total loan assets. The number may be inversely proportional to China’s systemic credit risk.

Off balance-sheet lending-表外融资

Leverage that does not appear on the books of a regulated lender. An intricate pass-the-parcel of credit risk in which the central government, and thus Chinese depositors, are both the likely winner and certain loser.

Ponzi scheme- 庞氏骗局

A scam whereby funds raised from new investors are used to pay out old participants. A term used by regulator Xiao Gang to describe the shadow banking system. Also see wealth management product, interbank market, trust company, housing, etc.

Quota-配额

In earlier days, China’s preferred way of allocating credit. Now quotas have officially been dispensed with, but their spirit lives on in the form of sky-high interest rates charged to private companies, and the rise of shadow banks.

Regulator- 监督管理委员会

A financial policeman with the ear of the Party, but none of its power. In China, regulators are split into banking, securities, monetary policy and insurance, to ensure weakness in numbers.

Shadow banking- 影子银行

Defined in most markets as credit allocation outside the remit of bank regulators, and without public guarantees. In China, used broadly to mean anything off the balance sheets of licensed banks.

Trust company- 信托公司

A company that will match investors and borrowers for a fee. Their assets grew over 50 percent in 2012. While many are benign, nefarious uses include moving loans off bank balance sheets, and raising money for real estate developers.

Useful idiots- 有用的白痴

Mythically attributed to Vladimir Lenin, the term for someone who enthusiastically supports a cause they do not understand. Today, could be applied to many foreign financial institutions.

VIE- 可变利益实体

A common structure used by offshore investors to buy into sectors the regulators have deemed off limits, giving them all the risks of equity, and none of the ownership rights.

Wealth management product- 理财产品

Short-term products issued by banks and securities companies to retail depositors, who see them as a risk–free alternative to the low rates offered on bank savings. May hide $2 trillion of credit, according to Fitch Ratings. Some see WMPs as financial liberalisation; others see a ticking time bomb.

Xi Jinping- 习近平

China’s president since March 2013 who, in financial terms, must foot the bill for a meal his predecessors cooked and ate.

Yuan- 元

China’s currency. While it is not yet fully convertible and its value is set each day by the central bank, the yuan is already being proclaimed by some as a credible replacement for the U.S. dollar. See “Useful idiots”, above.

Zero– 零

The number of bank failures or bond defaults that have occurred in China’s domestic markets over the past decade. Also, the chance of that situation continuing over the next one.

 

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