China’s economic apparatus is complex and sophisticated, with many facets that people, particularly non economists, don’t really understand. One of these obscure facets is the informal banking sector, which has come under close scrutiny in recent years. Informal banking is a huge industry in China, that includes more than 14% of the country’s GDP, amounting to something between 7.1 and 12.14 trillion Chinese dollars.
Informal banking fills a niche in the Chinese financial market underneath dominant national banks, and local government borrowing schemes. According to John L Thornton, in his China Center Paper, Chinese local governments command one-third of outstanding bank loans . Thornton said that state infrastructure projects soak up 30-40% of total Chinese loans.
As the government absorbs so much of the country’s credit, small and independent borrowers are left without financing options. Informal banking structures target this niche. Xia Gang, chair for the Bank of China said that informal lending organisations are “fundamentally a Ponzi scheme.”