Download The Developed Financial System Causes the Predicament of Zhejiang Merchants

EASTERN ACADEMIC FORUM
The Developed Financial System Causes the Predicament of Zhejiang
Merchants
YU Bin, JIA Shuyi
Global Institute for Zhejiang Merchants Development, Zhejiang University of Technology, China,
310023
[email protected]
Abstract: This paper points out that the over developed financial system harms Zhejiang’s economy,
and it creatively outlines SMEs of Zhejiang do not really encounter financing difficulty. It analyses that
the total scale and flow direction of credit have been distorted by speculation of Zhejiang enterprises,
and it also becomes the primary reason for the hollowing-out of the industry. Currently the deterioration
of global and Chinese economy situation triggers operational difficulties of Zhejiang enterprises.
Authors also provide some suggestions for the new development of Zhejiang.
Keywords: Over developed, Financial system, Regression, Hollowing-out, Entrepreneurs
1 Introduction
The economy of Zhejiang always takes the leading position on a national scale, so far still ranking in the
fourth among all the provinces and regions in China. But many scholars believe: Actually Zhejiang was
in the regression phase in the past decade, and its economic development especially in the enterprise
level has not progressed markedly.
Ranking
Table 1 Ranking of 31 provinces’ GDP of China mainland
GDP (100 Mn
Region
Ranking
Region
Yuan)
GDP (100 Mn
Yuan)
1
Guangdong
57068
17
Heilongjiang
13692
2
3
Jiangsu
Shandong
54058
50013
18
19
Guangxi
Jiangxi
13031
12949
4
5
Zhejiang*
Henan
34606
30000
20
21
Tianjin
Shanxi
12885
12113
6
7
Hebei
Liaoning
26575
24801
22
23
Jilin
Chongqing
11938
11459
8
9
Sichuan
Hubei
23850
22250
24
25
Yunnan
Xinjiang
10310
7530
10
11
Hunan
Shanghai
22154
20101
26
27
Guizhou
Gansu
6802
5569
12
13
Fujian
Beijing
19702
17801
28
29
Hainan
Ningxia
2855
2327
14
15
Anhui
Inner Mongolia
17212
15988
30
31
Qinghai
Xizang
1884
701
16
Shanxi
14451
China (mainland)
Total
519322
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Table 2 Ranking of GDP growth rates of 31 provinces in China mainland
Ranking
Region
GDP Growth Rate
Ranking
Region
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Tianjin
Guizhou
Chongqing
Yunnan
Shanxi
Gansu
Sichuan
Qinghai
Anhui
Jilin
Xinjiang
Xizang
Inner Mongolia
Ningxia
Fujian
Guangxi
13.8%
13.6%
13.6%
13.0%
12.9%
12.6%
12.6%
12.3%
12.1%
12.0%
12.0%
11.8%
11.7%
11.5%
11.4%
11.3%
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Hunan
Hubei
Jiangxi
Jiangsu
Henan
Shanxi
Heilongjiang
Shandong
Hebei
Liaoning
Hainan
Guangdong
Zhejiang*
Beijing
Shanghai
China (mainland)
GDP (100 Mn
Yuan)
11.3%
11.3%
11.0%
10.1%
10.1%
10.1%
10.0%
9.8%
9.6%
9.5%
9.1%
8.2%
8.0%
7.7%
7.5%
7.8%
Ten years ago, we talked about Zhejiang enterprises, and they are Zhejiang Materials Industry Group,
Wanxiang Group and Greely Group. What about now? Same. We can say during the ten years, Zhejiang
had no accomplishments in other economic field except that Taobao was propelled by Internet economy
which made Alibaba come into the stock market. Zhejiang Economy is obviously bad, and it shows
especially strong the news about the so called petition drawn by 600 enterprises at the beginning of 2013.
At this point, the government itself is not the only one who needs to rethink profoundly.
How shall we look at this crisis in Zhejiang? Could the government solve this crisis? In terms of hard
times Zhejiang economy going through, we can make a cursory summary.
2 Over Developed Financial System Harms the Economy of Zhejiang
Compared to banking systems across the country, Zhejiang finance is well-developed. Few places like
Zhejiang have shown the following two characteristics:
(1) The number of financial institutions is only second to that of Shanghai and Beijing.
(2) The tolerance for risk of financial institutions' credit availability is much higher than that in Shanghai
and Beijing where the finance is more developed.
These two characteristics are quite interesting. Zhejiang's economic aggregate takes the fourth place in
China which actually ranks just behind Guangzhou, Shandong and Jiangsu. The figure was around 3400
billion in 2012. But the number of financial institutions in Zhejiang may rank at the top of the nation.
Basically all the financial institutions that are able to open branches set up branches in Zhejiang. They
also set up branches in the name of representative office if not allowed to open branches. Meanwhile,
weirder still, there were almost no financial institutions losing money in Zhejiang between 2002 and
before 2009. It was the strong profitability that made every financial institution racks its brain trying to
open branches in Zhejiang. Many city commercial banks that were not allowed to open branches in
different places began to move into Zhejiang one after another.
The second point is the easiness of lending. Zhejiang is absolutely the first. In the 2006, People's Bank
of China required that the asset-liability ratio of trade circulation enterprises be controlled with 60%.
But in fact, none of the enterprises had the ratio less than 85%. Under this standard, enterprises in
Zhejiang would have no business to do if the head office did not change the standard. Later, the head
office gave permission to the Zhejiang enterprises that the ratio could reach 85% but added that
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Zhejiang was the only one in China. Did the words have relationship with today's financial situation in
Zhejiang? Was that right or wrong? They are worth thinking about.
Maybe it was because there were too many financial institutions in Zhejiang and the competition was
extremely fierce that enterprises in Zhejiang were always wandering among each bank. Many
enterprises' condition for loan became poor gradually since they continually kept challenging the bank's
bottom line. And there was a big premise that during the years from 1999 to 2008 when Zhejiang went
through breakneck economic development the quality of loans was high and there were almost no bad
debts. Banks in Zhejiang were always assailing the policy of head office with a sense of superiority and
saying that they always keep doing so without any problem. What's more, they asked the head office for
minimal intervention. Under such blind optimism, each bank gave the right of approving business to the
branch of each financial institution indeed.
Due to the combined effects of the continually declined standard for credit and the reason mentioned
above, Zhejiang economy made some important changes. The most important point is the spread of the
industry's hollowing-out. Why did the developed finance instead result in the hollowing-out of the
industry? By rights, well-developed finance should promote the development of industry. But it was a
shame that the development of Zhejiang finance did not go onto the right way. The profits many of the
entity economy in Zhejiang brought when they developed into the later phase were far behind the
increased profits brought by fixed assets.
In the past ten years, the situation was getting worse and hence there came a situation that bad money
drove out good. People who devoted themselves in doing business did not receive good results, on the
contrary, those who continued pumping out money from industry so as to do speculative activities made
great fortune. This phenomenon made many enterprises go on the road of speculation naturally.
3 A Pseudo-proposition that SMEs in Zhejiang Encounter Financing Difficulty
There was some thing wrong with the saying that medium-sized and small enterprises in Zhejiang
encountered financing difficulty. According to the estimates of some experts, nearly 90% of the loans
that Zhejiang enterprises used were diverted to the area outside the production and management of the
enterprise. In other words, enterprises in Zhejiang were not out of money. Why did they apply for loans
if they did not lack in money? Zhejiang entrepreneurs have natural sensibility and super ambition.
The so called sensibility is the ability to find the way to make money over others. Zhejiang
entrepreneurs can always acquire knowledge over other people. The so called enterprise is the
willingness to struggle as long as there is 1% possibility to make a big fortune. The two characteristics
are the fundamental reasons that Zhejiang entrepreneurs can go out to the world market as well as they
always get into troubles.
Sometimes it seems like a pseudo- proposition that how much money on earth SMEs need. As for those
who cannot receive loans to expand investment in assets, they are bound to say they are out of money.
Because they are jealous of other people who can get money to make speculation, they continually
providing situations of financing difficulty and thus look short of money. But when we settle down to
see, they actually need money to make investments rather than do business.
4 The Total Scale and Flow Direction of Credit Have Been Distorted by
Speculation of Zhejiang Enterprises
Is Zhejiang able to endure so much credit? The answer is certainly no. Thus large-scale risk events broke
out. The influence is always finite when there are only several speculations within an area. But the
problem can be serious once mass participation in speculation break out. What’s more, financial
institutions in China have enormous system deficiencies. When the superimposed situations occur, it
becomes natural that the provincial economy gets into trouble.
Many scholars have begun to attack the phenomenon of the mismatch between bank loans and the
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demand of enterprises, which is the main reason that makes enterprises use shot-term loans to do
long-term business. So when the term of the loan does not match the actual endurance, the risk of
enterprises is large and uncertain. Many people among the Zhejiang merchants dare to use shot-term
funds to do long-term business, as a result of which, many unpredictable events occur. Plus that
Zhejiang finance generally accepts secured loan, and then naturally derives many external events.
Miserable people are those enterprises whose loans have been drawn by banks. Companies are
complaining about how irresponsible the banks are and taking away their loan arbitrarily. It’s hard to
accurately describe the problem of pumping out loans, but this problem would not exist if funds were
used reasonably to do business because the enterprise would not borrow money more than its cash flow.
Of course, the investment in some large fixed assets and the use of funds for some major acquisitions are
excluded. But a responsible enterprise must ensure the borrowing of long-term capitals and not to do
short-term dismantling. Because once the project is launched, the enterprise would face liquidity
problems if the funds could not be sustained. Facts showed that the enterprises which had been selective
in funds often developed best and the enterprises which accepted everything went on a road that leads to
death. This statement can be known without doing research. Too many entrepreneurs in Zhejiang made
great fortune overnight due to the easy access to funds and their business collapsed suddenly also
because the funds came easily.
5 The Primary Reason for the Hollowing-out of the Industry
What is the reason for the hollowing-out of the industry? As mentioned above that the fast appreciation
in asset value is one of the reasons, and the other reason is the responsibility of the financial institution.
There are a large number of financial institutions in Zhejiang, and in theory this should make
medium-sized and small enterprises have easy access to cheap loan funds. Strangely, the financial
institutions in Zhejiang could soften the terms of credit approval constantly. But the two conditions form
an alliance for offence and defense. The first condition is to have enough deposit and the second is the
loan interest rate.
Almost all the financial institutions require enterprises to deposit money when they apply for loans.
Secondly, almost all the financial institutions would raise the loan interest rate they set. In fact, the
convention of Zhejiang’s banks has existed for many years. After the so-called 1:1 matching deposit was
paid back, many banks required 1:2 matching deposit. That is to say, you had to deposit 20 million if
borrowed 10 million. Of course, it is common to borrow 10 million and at the same time deposit 5
million. Such operating practices pushed up the cost of loans in disguised way. In Zhejiang, if we should
say that the usury runs amuck everywhere, to some extent, this means that the bank is the biggest loan
sharks. Because as I said before, even though one deposited money at 1:1 while borrowing, the loan
interest rates could beyond 12% not including other fees.
There are two consequences of the situation:
(1) The entity becomes hollowed. Because the gross profit of the real economy for one year is around
10%. Where to get the profits to pay interest? So the enterprises invest the loan into the industries—real
estate or other speculative fields, which are more profitable than the real economy.
(2) Turn to lend the capital. What to do if one does not have the very ability? Lend out. Lend the capital
to those who are willing to pay a higher interest rate. That is to say, borrow money from banks at the rate
of 12% and then lend it to others at the rate of 20% or 30%. Such process invisibly increases the
superposition of risks.
Thus, in Zhejiang, we could say that 90% of the loans are actually distributed directly or indirectly to
two areas, one is the real estate and the other is the speculative industry. The speculative industry, to
some extent, pushes the industries to a situation where they are hard to sustain survival.
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6 The Deterioration of Economy Situation Triggers Operational Difficulties of
Zhejiang Enterprises
With the deterioration of economy situation, the shrink of numerous speculative industries and the
ongoing contraction of real estate, it is quite normal that those enterprises who engage in speculation
using short-term funds of banks are confronted with the current regression.
In general, the over-relaxed conditions of loan make the funds of enterprise be pulled out once the bank
implement strict terms of credit. But in fact, according to the current condition of Zhejiang enterprise,
none of the enterprises can withstand the bank taking away even a small part of the loan. Because the
high leverage of Zhejiang enterprise and those substantial funds are removed from entity economy to
other project investments which lead to the poor liquidity, some things must happen to the enterprises
once the loans are taken. This is the most immediate cause of the frequent accidents happening to
Zhejiang enterprises. The ostensible reason for the so called petition drawn by 600 enterprises was that
the large guarantee chain makes the loans be taken from the enterprises. But the deep reason was that the
funds were diverted to any other purpose and the liquidity was so poor.
The sharp deterioration of economic situation is one of the main reasons that result in frequent accidents
happening in Zhejiang but not the fundamental reason because the situation of other provinces and cities
is not as serious as that of Zhejiang. Every time the economic situation gets worse, something bad must
happen in Zhejiang. Why? As Zhejiang enterprises prefer to use leverage to hold themselves tight.
Especially when funds are diverted to some capital intensive industries like real estate and speculative
industry, the rise of incidents has become a law. This year, many enterprises in Zhejiang were locked in.
In addition, banks offered loan with great caution due to the poor economic situation. It is predictable
that enterprises in Zhejiang must encounter some incidents. It is quite important for bank to judge the
big trend because of its periodicity. When the trend looks good, the credit institutions are free to do
whatever they want regardless of the security and pledge. Because the cycle goes upwards and the
possibility of accidents is relatively low, it is time to make more money. When the cycle goes
downwards, the credit institutions should put strict control on the terms of loan. Do less as far as
possible or even do nothing. Make money only when the trend was good so that you would lose less
money when the trend was bad.
7 Suggestions of the New Development of Zhejiang
Finance aggravated the “hollowing out” of entity. But in fact, the hollowing-out of entity in turn led to
the finance unable to be pushed forward. Finance is like the lubricant of entity economy, but cannot
replace it. The hollowing-out of entity economy, to some extent, pushed Zhejiang the front of line. There
was a cause and effect relationship between finance and entity economy in Zhejiang. Due to the
hollowing-out of entity economy, even though Zhejiang Finance was willing to engage in entity loans,
there was no way to go. In Zhejiang province, we cannot find a large or super large enterprise in the
whole province. However, Zhejiang needs introspection of this reality when we look at the enterprises in
Jiangsu, Shandong and Guangzhou.
Actually, current financial reform is promoting the further privatization of finance as well as focusing on
the newly-set financial institutions, which make people think that the government is going the opposite
way. For the over-developed finance, the government should suppress and shrink it. How can the
government keep releasing it? Our financial system should go onto the way of encouraging the diversity
development of finance and simultaneously encourage the innovation of new financial products.
At present, small-loan companies are very hot. But can the new establishment of small-loan companies
or village banks solve all these problems mentioned above? The number of banks in China and other
similar financial institutions is not too small, but too large. Though there are thousands of banks in
America, most of them are small-scale community banks which are not able to make interregional
businesses. What about the banks? Conversely, at the end, small-loan companies and new established
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village banks are bound to go onto the road of usury where the interest rate is higher than that of bank
because pursuing benefits is the instinct of all enterprises. Now the average lending interest rate of
small-loan companies is around 18%. Who would be their customers? Could they solve the problem of
hollowing-out of entity economy? They would only aggravate this problem.
One interesting point about financial institutions in China is that they finally form a homogenization of
competition. Pawns, small loans, village banks, city commercial banks, joint-equity banks, state-owned
banks and even leasing companies all develop into issuing loans or high-interest loans. Even if you set
up more financial institutions, you would eventually go back to this way. Does it make any sense?
What happened in Zhejiang this time was not a bad thing. Let enterprises in Zhejiang return to a
reasonable way of development, otherwise the next crisis should be more serious. In general, making
use of heavy leverage to expand investment in fixed asset will be quite difficult to continue over the next
decade. In the coming decade, China’s GDP will gradually decline from 8% to the figure between 4&
and 5%. Such declining curve has become a trend. In other words, it looks less likely that we use the
significant rise of asset’s value to get benefits.
Back to this article, under the circumstances of the large-area decline in Zhejiang economy, the turmoil
in business and the instability of enterprises will become a normal phenomenon. Everybody should treat
it with our usual mind. Of course, if the government took appropriate measures, the local authority
implemented the policy effectively and Zhejiang merchants took risk to innovate, we should create
updated version of Zhejiang economy.
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