U-Bankers

So the Chinese government is revising laws to legalize underground banks. At least, legalize the lending business (foreign exchange is a different story, the government won’t let that one go for the time being). So what is the problem with their existing banking system? What can some of these underground banks do that the big banks can’t?

For one thing, its credit rating is tracking the wrong dude. The current system only tracks credit history of companies. Under this system, any average Joe can work the magic: creat a few companies and shuffle money around them – the goal is to make some of them credit-worthy at the expense of the other ones. Once you have built up a basket of beautiful apples, you have got your loancow (like cashcow of loans), and you may throw out (default) the bad lemons.

But the state banks are not stupid; they know this trick by heart too. Consequently, they don’t lend to your company unless they know you, or they know somebody who knows you. So hence a vague individual credit rating system. However, the network of who-knows-who does not help most of the smaller name, SMEs entrepreneurs, especially in the rural area where developments have lagged behind.

In turn, these SMEs entrepreneurs look to the savior - the informal underground banks (Check Here).

Some of these underground banks are actually more visible than you think. These U-Bankers often know the SMEs entrepreneurs well, both run business in the same industry and they likely have extended loans to the entrepreneurs in one form or another (think of a supplier-and-buyer relationship). Most importantly, U-Bankers have far better information on prospect customer’s ability to make payments.

As a case study, 奧康集團, a shoe maker from Wenzhou has set up a 1.5 billion loan company with state bank’s help and finance - 永嘉瑞豐 - (Check Here), and all of the 1.5 billion loans was ditched out three month after the company was set up.

I do not have a list of 瑞豐‘s customers. But I would bet those who borrowed from the pool of 1.5 billion were the shoe maker’s suppliers, business affiliates and the likes.

What is amazing is that I think a semi loan-bank like 瑞豐 will actually make a formidable profit. It charges a monthly interest rate of 10.2% to 23.1%, this is 122% annually! ((Check Here)) And, this is legal.

But, what if these loans are extremely risky therefore a loan shark-like interest rate is justified.

Sure, that could be the case, and I am no risk management expert. But, if my assumption was true, and that 瑞豐 only makes loans to those who it knows well and has credit information of, then the default risk could be mitigated somewhat. At the end of the day, 瑞豐 is operating with an on-paper yield of 122% and up, so they should have some appetite for risk.

So there you go, who would think some shoe maker out of a rural town in China has suddenly set foot in the high risk, high return venture capital funding business. Thanks to China’s out-dated banking system.

China is more Capital-centric...

So a few beloved friends of mine travelled to Hong Kong, as we met up for drinks, a ‘over-the-beer’ conversation centered on the form of “capitalism”.

One claimed: “On a scale of 1 to 100, China now resembles more capitalism than that of the U.S.”.

And, another friend concurred.

I couldn’t disagree more with what was said! But I didn’t know what arguments I could present to counter the claim. So it prompted me to look up Wikipedia for the definition of “Capitalism”.

“Capitalism is the economic system in which the means of production are controlled by the private sector rather than by government.”

Well, let’s see, on a relative basis, which government (China or U.S.) has more control over its nation’s production (think state-owned banks, oil/coal production companies, telecommunication companies and airline companies, etc.)?

While we have seen real estate development been privatized, which country, today, has more rigid control on its property rights and commodity prices (think no individual can own land in China but lease them, and the property price cooling measures Beijing has administered in the past twelve months)?

While the answer is obvious, I have to appreciate the topic of discussion. With the way China has transformed its centrally planned economy to a mixed one, how soon can we expect China to overtake the U.S. as the biggest economy, and when that happens, would it be as capital-based as the U.S.?

Here comes the Taskforce on economic challenges...

So the Taskforce appointed by Donald Tsang to tackle and advise on economical challenges Hong Kong faces has delivered their 'insight' from their first meeting:

From SCMP, Nov 4th 2008:

"Being a small and open economy, the risk of Hong Kong going into a recession...It is expected that four sectors relating to financial services; trade and logistics; tourism and consumption-related services; and real estate and construction will be hit rather harder in the next year or so."

Yeah, thanks dude, why don't you just said every sector other than the IT industry will struggle? Oh, wait, there is not much IT industry in Hong Kong, so you can just say 'every industry will struggle'.

Thank you, and please send the cheque my way.

A lehman brothers deal

So, would you still market your product using the 'lehman brothers' brand?

Don't peak yet, think.

The sentiment on property market in Hong Kong has turned, and property investors are eager to offload their investments. But how do you make your ads stand out from the crowd?

You call it a "lehman brothers deal". This branding strategy is cited from some creative sales ads in Hong Kong - see picture below. If that is not enough, we also have some 'financial crisis deal' to go along.

How did Mortgage-Backed Securities bring down the Investment Banks

So I have been thinking about this question: given that Mortgage-Backed Securities (MBS) are risky investments, but once they are securitized and sold to investors, they are off the balance sheet of the investment banks, so why would the subprime fallouts bring down these investment banks.

I have tried to ask around, but none seem able to give me a satisfied answer. Articles from newspaper had always skipped on the mechanics, most of them offers nothing more than the old “investment banks have lost a lot of money from these MBSs, therefore they are in trouble”. But why are they in trouble if they have securitized these assets and sold them off?

After some research, I have come up with some hypothesis, and this is what I think: the investment banks buy mortgages from the mortgage underwriters, these mortgages are then pooled together before they are separated into various trenches. Each trend has a level of risk and coupon rate, much like senior debt versus junior debt, where senior debt is less risky but offers a lower yield. So the ibanks resell these mortgages of various trenches.

Now, ibanks retain some of these mortgages, and as it turned out, they retained the ones in the lower trench – the ones that are the riskiest but with highest yield.

In an up market (like 2006 and 2007), most of the MBSs performed and the lower trench MBSs were the most profitable, that is why ibanks earned some record profits in 2007. However, as the market begins its downturn, some of these mortgages defaulted, and the MBSs in the lower trench were the first one to hit. So follows the problems with the ibanks.

If you have another view, or that mine is simply off the mark, I will be happy to learn from you. But please remember to explain the mechanics in layman terms.

Spoiled Asian Flyers

It was an interesting read on today's SCMP column, of an interview on Tony Tyler, CEO of Cathay Pacific Airlines.

Some passenger was also interviewed and he shared his experience with Cathay:

"...Others say that faltering cabin crew morale is having a divisive impact. 'On a good day, Cathay is still the best in the world', judges another frequent flier, 'but you can't be sure of a good day. I travel ecnomy because business is tooexpensive. On one outbound flight recently, I felt like royalty, the crew were superb. The inflight manager, whom I had never met before, talked to me at length even though the flight was full. All the crew greeted me by name, made sure I got Perrier with lemon, my meal choice, little things that don't cost anything except professional effort, wonder, Cathay is the best."

"On the return sector, it was the exact, dismal opposite. I was carrying some flowers. The inflight manager commented as I got on board, 'Nice; are they for me?' That was the last I saw of her"

"No one offered to put the flowers in the chiller, as good Cathay or a Japanese airline would have done automatically. The service was mediocre, and the crew spent time in the galley chatting about what to do on their layover..."

So as I read the 'bad' service this passenger saw on his return flight, I thought, hey, that is 'good service' on a Air Canada flight.

green bean and red bean

So are you a Ron Artest fan? I am not. But he is definitely entertaining...in a bad way.

The link below is Ron's response when asked about Josh Howard's controversy - Josh Howard was filmed disrespecting the US national anthem. Mr. Artest's response, and you gotta like this, is "I think Josh Howard's comment is a reflection on education...".

http://sports.yahoo.com/nba/blog/ball_dont_lie/post/Ron-Artest-weighs-in-on-the-Josh-Howard-controv;_ylt=AkakI74v_mz1FVbGuyvkfhm8vLYF?urn=nba,108744

Reflection of education? And this is from Ron Artest? Are you kidding me? Is it the same reflection of education when Ron went in to the fans and started the biggest fans-versus-athletes brawl in NBA history on the night of 22 Nov 2004?