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China door shut, tycoon enters US

BEFORE any Chinese individuals are allowed to own their own banks at home, some pioneers are providing a litmus test overseas. Wenzhou entrepreneur Lin Chunping, 42, who owns a Chinese food company and several mining and investment businesses in Africa, Europe and the US, made the surprise announcement earlier this month that he had acquired Atlantic Bank in Delaware for US$60 million and took over operations at the failed lender last November.

The news struck a chord with many Wenzhou businessmen, who have been both reviled and praised for their aggressive entrepreneurship and have borne the glories and sins of private lending in China.

Wenzhou businessmen have long been known for their acumen in commerce, and have been at the forefront of seizing business opportunities. The city earned a reputation as the cradle of private entrepreneurship in China. But lately that reputation has been tarnished by a string of failed businesses and widespread reports of loan sharking among unregulated private lenders who financed the local boom.

Overseas ambition

Small wonder that Chinese regulators have rejected several applications for permission to grant banking licenses to individuals.

Lin, who has frequently expressed his disappointment at being unable to open his own bank in China, simply went offshore to fulfill his ambition.

He renamed his new Delaware acquisition US New HSBC Bank, even though the lender has no connection with UK-based bank HSBC, and said he plans to hire 50 staff to serve the overseas Chinese community in the Delaware area on the East Coast of the US.

He told the Chinese media that the bank will make money mainly through deposits from local residents. Some have suggested he may use any profits to finance his business activities in China.

That aside, it's interesting to look at the factors that made the acquisition possible.

More than 150 mostly smaller banks in the US failed last year alone in the continuing aftermath of the global financial crisis. Meanwhile, the cozy position of China's mostly state-owned financial institutions has hindered reforms aimed at diversifying and opening the market further, thus relegating private lenders to a still gray zone.

The Atlantic Bank is probably a microcosm of the more than 400 US banks that failed after the financial collapse in 2008. About 90 percent were sold to other institutions, according to data from the Federal Deposit Insurance Corporation, which oversees some aspects of the US banking system.

'Jews of the East'

Established 85 years ago by a group of Jewish investors, Atlantic Bank filed for bankruptcy in 2009, according to a statement from Lin's Chunping Group. It took two years of negotiations to seal the sale.

"To hunt for a bargain amid local US banks involves complicated procedures," Lin said. "The bank originally asked for US$600 million."

In the statement, Lin proudly described Wenzhou entrepreneurs as the "Jews of the East," who are daring enough to explore new frontiers.

Religious references notwithstanding, Lin brings solid business credentials to the table, though not in banking. He holds a double master's degree in economics and financial law. Chunping Group, based in Wenzhou, was founded largely as an agricultural trader in commodities such as rice and packaged tea before diversifying.

Chinese regulators have been reticent about private lenders, believing they involve very high risks, complicated personal relationships and sometimes even the use of violent coercion in collecting unpaid debts.

But I have an uneasy feeling that the unregulated private lending market is too well-established for administrative measures to deter. I have three Wenzhou friends, and as far as I know, two of them send part of their salaries home on a regular basis as contributions to their families' lending businesses. Private lending thrived in Wenzhou as the central government tightened monetary policy and mainstream banks became increasingly reluctant to lend to smaller businesses that can't offer strong guarantees of repayment.

Interest rates in the gray lending market skyrocketed, forcing some factory owners to flee Wenzhou when they couldn't keep up with their debt payments. By the middle of last year, a Chinese version of the US subprime crisis burst out in Wenzhou.

More recently, Zhejiang businesswoman Wu Ying was given the death sentence for alleged fraud and illegal fund-raising after she amassed 700 million yuan (US$111 million) from 12 friends and acquaintances. Many people saw that as an ominous signal for private lending businesses. The State Council, China's cabinet, has encouraged regulation of the private lending realm since May 2010, and Premier Wen Jiabao has said four times this year that there needs to be more "guidance" for private lending.

There is something in the Chinese psyche that tends to prefer stability over crisis and public controversy. The chaos in Wenzhou, together with the outflow of private capital, may remind regulators that they still have a lot of work to do to make China's current financial system more modern, effective and fair to all.


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