The Wenzhou ‘‘stir-fry’’ is not a dish you eat. But it is giving indigestion to Chinese regulators and could prove troublesome to many investors worldwide — from New York money managers, Pennsylvania steel workers and Midwestern farmers to miners in Australia. In this freewheeling city at the forefront of China’s capitalism, the dish is prepared when a group of wealthy friends pool millions of dollars worth of Chinese yuan and put it into a hot investment like Shanghai real estate, where it is stirred and flipped for a hefty profit. The friends often lend each other large amounts on the strength of a handshake and a handwritten MoU. Both sides then go to an automated teller machine or bank branch to transfer the money, which is then withdrawn from the bank. Or sometimes, they do it the old-fashioned way: Exchanging burlap sacks stuffed with cash. In the last few months, borrowing and lending across the rest of China is looking more and more like Wenzhou’s. The growth of this shadow banking system poses a stiff challenge to China’s state-owned banks, already burdened with bad debt, and makes it harder for the nation’s leaders to steer a fast-growing economy. The problem starts with China’s low interest rates. More and more families with savings have been snubbing 2 per cent interest on bank deposits for the double-digit returns from lending large amounts on their own. They lend to real estate speculators or to small businesses without the political connections to obtain loans from the banks. Not only is the informal lending rate higher, but the income from that lending, because it is semi-legal at best, is not taxed. For fear of shame, ostracism and occasional threat from thugs, borrowers are more likely to pay back these loans than those from big banks. Tao Dong, chief China economist at Credit Suisse First Boston, calculates that Chinese citizens withdrew $12 billion to $17 billion from their bank deposits in August and September. The outflow turned into a flood last month, reaching an estimated $120 billion, or more than 3 per cent of all deposits at the country’s financial institutions. If bank withdrawals are not stemmed in the months ahead, Tao warned, ‘‘this could be a huge risk for financial stability and even social stability.’’With China now accounting for more than a quarter of the world’s steel production and nearly a fifth of soyabean production, as well as some of the largest IPO of stock, any shaking of financial confidence could ripple quickly through markets in the US and elsewhere. — NYT
