“Stole” the below from an email on which I was cc’ed from one of my firm’s China lawyers setting forth who from a China SOE (State Owned Entity) should sign its China contract.

1. SOEs have business licenses just like other Chinese companies.

2. Each Chinese company has only one “legal representative” (a term of art under Chinese law). That person is identified as such on the company’s business license.

3. Any agreement signed by the legal representative is binding, whether or not a chop is attached.  (Of course, to enforce the contract you will need to prove that the signature is really that of the legal representative.)

4. Any agreement affixed with the company chop is binding, regardless of who signed on behalf of the company. (Of course, to enforce the contract you will need to prove that the chop is actually the correct chop from the correct company.) This is why control of the company chop is quite important, and the chop is usually kept by the legal representative or some high-ranking company officer/director.

5. Having an agreement signed by the legal representative AND affixed with the company chop is therefore a belt-and-suspenders approach. In China, it is also advisable.

6. It is also possible that an agreement that is not chopped and not signed by the legal representative will be enforceable against a company, if a company executes a number of agreements in this fashion. This is fact-specific and is definitely not a desirable approach.

7. One way to verify (or at least to gain some more certainty) that an agreement is executed in a technically correct fashion is to go to the company’s offices and review several other contracts that have been executed by the Chinese party. And, if possible, also contact other parties that have executed contracts with the Chinese party. Does the execution page bear the same chop? The same signature? If there are any differences, are the differences consistent? For instance: perhaps the chop is always used, but depending on the type of contract or type of customer, maybe the sales manager signs or maybe the VP signs or maybe the legal representative signs.

8. In larger companies, many (if not most) of the contracts are signed by someone other than the formal “legal representative.” For instance, the _______ contract on which we are currently working will be signed by ___________’s president and co-founder, who is not the company’s legal representative.

I know I have been writing too much lately regarding China’s economy and I know that much of what I have written has been negative. But I have to tell you that I am starting to see all sorts of fissures breaking out in China’s economy and they are scaring the hell out of me. I am not writing to jump on any bandwagon (as one e-mailer accused me) but because I am really worried.

I am worried not just from what I am seeing, but because the real economists out there (not the people who claim to be economists just because they live in China) are also saying some pretty scary things. One of those real economists, Michael Pettis, just came out with what I see as a brilliant piece on how China has overinvested in capital and how its capital investments have been misallocated. It is entitled, “How do we know that China is overinvesting” [link no longer exists] and I strongly urge you to read the whole thing.

I love Pettis’s piece for three reasons. One, I have never bought into the idea that a bunch of geniuses sitting in Beijing are betting at allocating funds than the invisible hand. And I certainly have never bought into the idea that the local governments spending funds are either.  Two, I have been seeing with my own eyes what I thought to be misallocations, but at least half the time when I raise them to people, I get a response like, “well surely the people in Beijing are better equipped to know whether 3 million vacant condos, bridges to nowhere, and train stations in nowhere make economic sense than you are.” I have never thought that is the right question and I have always felt that many of those who refuse to admit China can do no wrong economically are so tied to the system as to have lost any real perspective. Three, the analysis is absolutely first rate and it has been a long long time since i have seen an analysis of Chinese economy of which I could say that.

The article focuses on China’s investment in electric car technology as an example of misallocated capital and it does a great job of explaining why even an investment so initially appealling as that can be a big mistake.

Pettis explains why he sees China having missollacted its capital:

Of course the question of whether or not China is misallocating capital can be endlessly debated because it is very hard to prove except in retrospect.  I would argue that there are several reasons why we should believe that capital has been wasted on a large scale for many years.  The first reason is simply historical precedents, something which unfortunately rarely enters into most economic analysis.  No country in history that has had anywhere near the growth in investment as China has not had a serious problem in subsequent years, in which debt rose to crisis levels and growth ground to a stop.

The fact that China is so poor is often proposed as an argument as to why this cannot also be the case for China, but of course this is a nonsensical argument.  Poorer countries with lower levels of worker productivity are less able, not more able, to absorb very high levels of investment.  This may seem counterintuitive at first, but only if you believe that there is a single optimal level of investment for every country regardless of its specific conditions.  If the purpose of investment is to save labor and labor cost, then it should be clear that the lower the level of worker productivity and the cheaper and more abundant the amount of labor, the less investment in capital stock is justified.

This is why when so many analysts compare the per capita capital stock of China with that of the US or Japan, and then announce that this proves China has a long ways to go before it runs out of investment opportunities, I am always surprised, and even a little skeptical about their economic backgrounds.  This comparison simply does not make sense.

If it did, overinvestment crises would be largely limited to rich countries, not poor countries – something that is certainly not confirmed by history.  Anyway I find bizarre the idea that the best comparison for China, one of the poorest countries in the world even if you accept the validity of GDP numbers and ignore the very low GDP share of household income, is the US or Japan, two of the richest and most technologically advanced countries in the world.

But I think there are more formal reasons to believe that China is misallocating capital.  Common sense suggests that when there is massive investment with

  • very little accountability,
  • severely distorted prices,
  • an incentive structure that concentrates the benefits of investment in specific jurisdictions and over a short time period while spreading the costs throughout the national banking system and over the debt repayment period (which can be decades),
  • no or very limited budget constraints,
  • factional and regional conflicts, and
  • shifts in responsibility as the instigators of the investment are promoted (often because of the positive impact of their own investment initiatives),

it would be a rare system in history that did not tend towards substantial capital misallocation.

Certainly the evidence on SOE investment suggests that this is indeed what happened.  A number of studies have suggested that if over the past decade you add up direct subsidies, the impact of monopoly pricing (which is of course simply a tax on households) and the interest rate subsidy, they total anywhere from six to ten times the aggregate profitability of the SOE sector.  This means that unless the externalities associated with the SOEs are also at least six to ten times their aggregate profitability, they are actually value destroyers.

If you have any interest at all in China’s economy, you really should read the whole article. I buy it. Do you?

Now that I have your attention with my Global Times-ish headline on protectionism in China, I am going to backtrack.

The protectionism that people attribute to China is wrong. I have become convinced that the protectionism that people tend to attribute to China does not really exist, or at least barely so. The Chinese government does not care nearly as much about its domestic companies as widely believed, at least those that are not State Owned Entities (SOEs). Instead, the Chinese government cares almost exclusively about the Chinese government. Once you understand this, you will be better able to know where you, as a foreigner, stand.

I just read a China Hearsay post noting how China’s Ministry of Commerce’s recent approval of Yum! Brand’s purchase of Little Sheep Restaurant should put everyone’s fears to rest about China using its M&A review for protectionist purposes. China Hearsay was not the least bit surprised by this approval, nor was I. I figured the approval would come because the buy-out was not going to impact much (if at all) the things China’s government really cares about.

The Chinese Government is still uncomfortable with private business and it rarely, if ever, steps in to assist them just to assist them. Therefore, if you as a foreign business are going to be competing with private businesses, you likely will do okay. If you are going to be doing business in an arena dominated by SOEs there is a much better chance of your facing problems.

If you are going to be doing business in areas critical to the government, such as internet, publishing, movies, mining, defense, automobiles, then you really need to be very careful about what you are doing, both in terms of its legalities and in terms of how you will be viewed by the government. Each of these industries can be very different in terms of how you will be viewed by the government. By way of example, foreigners are not treated terribly well in the movie business and many have cried “protectionism” because of this.  The Chinese government’s policy towards foreign films does seem like protectionism, but because foreign films are limited for informational reasons and not to protect China’s domestic film industry, calling it protectionism may not be appropriate, especially since there does not appear to be all that much love lost between Beijing and China’s own film industry. Mathew Alderson, who represents a number of media companies in China, wrote on this in a post, entitled, Protecting Hollywood Films in China Makes Sense For China:

It is not the local Chinese film industry that wants to stop foreign films. Far from it. Barriers to entry such as China’s twenty foreign film quota, and the requirement that foreigners shoot their films in China as Chinese co-productions, are there to stem the invasion of Hollywood’s “corrupting” influences, which the  Chinese government sees as US propaganda or soft power. These barriers really have more to do with the government’s desire to preserve what it deems important than in protecting the local Chinese film industry.

The same is generally true with respect to publishing.

But if your business is something like retail, or electronics manufacturing, then you probably have nothing to worry about from Beijing by way of protectionism . That is not to say you do not have other issues you need to worry about, including local governments that may not appreciate your being there, but odds are good you do not have an enemy in Beijing.

What do you think?

I know nobody wants to hear this and I know this is going to cause me to get hate mail from those whose livelihoods are tied in to China’s continuing to boom, but I am seeing all sorts of bad news on the horizon with respect to China’s economy.

A client meeting yesterday was the last straw. The client I met with is very sophisticated, very large, and, most importantly, very experienced. The client is a very large commodity seller who sells massive amounts to China. This company typically sells its product to Chinese private companies that use letters of credit. Prior to 2008, this client’s Chinese customers pretty much always paid. Then in 2008, they started contesting the letters of credit and seeking lower prices than that to which they had agreed. Soon after that, they started rejecting the shipments entirely. My client told me that in the last 3-4 weeks, nearly all of his non SOE (State Owned Entity) Chinese clients have contested the letters of credit and have sought lower prices of around twenty percent. They are confessing to my client that they cannot get loans and without loans they cannot pay so much.

If it were just that, I might chalk it up to problems in one industry, but it is not just that. Chinese companies that are going out of business or believe they are going out of business have an annoying tendency to ship bad or fake or no product at all. In 2008, pretty much every week we were getting calls from companies saying that the product they had ordered just was not coming. We handled one case where a company had bought about a million dollars of fish and received containers of cheap bricks surrounded by fish. That fake shipment was the dying gasp of a company that ceased to exist. We have started to get those same sort of calls in large numbers again.

We are also seeing it on the flip side of Chinese companies buying product from our U.S. clients or even trying to buy U.S. companies outright. The numbers are small to begin with, but it just seems like we are seeing an increase in Chinese companies that paid a deposit simply walking away from their deals.

What are you seeing out there? Is it really this bad, cause it sure feels like it?

I have been practicing international law for so long that I can understand English language lawyer emails from just about anywhere in the world, pretty much no matter how poor the English. I love getting an email in Kanglish (Korean-English) or Chinglish (Chinese-English) and showing it to someone else who has absolutely no clue what it means and then explaining it to them. Well you see, “maybe” in Kanglish means “no way” and “we can do that” in Chinglish means “very unlikely.” You get the point.

I feel the same way about reading the China Daily. It takes years with that newspaper to be able to cull out the inner meaning of so many of its articles and I consider myself somewhat of a master at it.

The China Daily story (h/t China Hearsay) that has precipitated this post is entitled, “No discrimination over China contracts” [link no longer exists], and it fits into the following common genera (plural of genus) of China Daily stories:

  • Me Thinks Thou Doth Protest Too Much/Stopping the Buzz. This is the China Daily article that comes out after weeks or months of rumors about something that is completely true. The point of this article is to seek to disprove that which everyone either knows or will soon know.
  • Too Categorical to be True. This is one of my favorites because one knows instantly from the title that it just cannot be true.

This China Daily article notes “rising complaints from major trading partners that foreign companies are being treated unfairly in China’s huge and rapidly growing public procurement market” and then dispenses with them by quoting a Peter Duncan who tells us that “I don’t see discrimination against the foreign in government tenders:”

Duncan and some other foreign business people who have been working closely with their Chinese partners and clients have a rather different perception. They say they suspect the perception of “unfairness” stems from a misunderstanding of the rules and the less obvious nuances of doing business in a different culture. Duncan says that the experience of his company in China can help ease foreigners’ concern about the complicated rules.

I ain’t buying that and here’s why.

For years, I heard almost nothing about this sort of discrimination from our American clients who sold goods and services into or in China. But in the last three to five months, I have been hearing so many complaints that I am thinking that someone or something from on high in Beijing has issued some sort of directive. What I am mostly hearing from our clients who sell to China from the United States is that if they do not form a Chinese entity the SOE (State Owned Entity) to whom they have been selling their product or service may have to stop buying from them. I am also hearing from a few of our clients who already have entities (WFOEs) in China that some of their SOE customers are suggesting business woudl be better if they were to go into a joint venture with a Chinese company.

The companies from whom I am hearing these things are not inexperienced in China, as the article implies we should expect them to be. Rather, they are some of our most China-experienced clients and they (and a bunch of other people) are talking about this now because they are seeing and feeling the difference.

It is getting to the point where I am telling people that if you want to sell goods/services to Chinese SOEs the best way to do so is through a Joint Venture, the next best way is via a WFOE and the third best way is via a foreign (U.S., Hong Kong, or whatever) entity. Nothing has changed on this but whereas the gradations between these three methods was fairly low last year, they sure seem a lot larger now.

What are you seeing/hearing out there? Who do you trust, my clients or the China Daily?

UPDATE: The Associated Press has come out with an article, entitled “Survey: China treating foreign companies unfairly” (h/t China Hearsay). The article refers to a just released European Chamber of Commerce report in which “43 percent of 598 European companies that responded to a survey see Beijing discriminating against foreign businesses, up from 33 percent in a similar survey last year. It said 46 percent expect the problem to get worse over the next two years, up from 36 percent last year.”

I knew I wasn’t just imagining this.

The Wall Street Journal just did an interesting story on growing private entrepreneurship in China, entitled, “China’s Entrepreneurs Offer a New Path: Best Hope for Country’s Economy May Lie With Private Enterprise, But Inexperience Could Hurt Effort.” The article focuses on Broad Ltd., a Changsha(Hunan province) company that manufactures giant cooling systems that do not rely on electricity.  The company sells its coolers worldwide.  Changsha is perhaps best known as Mao ZeDong‘s hometown.

Zhang Yue founded Broad in 1988 and he has done so well with it that he owns a helicopter and a jet plane.  The WSJ describes Mr. Zhang as “the new face of China:”

Mr. Zhang is the new face of China, where private enterprise was only officially recognized a few years ago. Today, China’s entrepreneurs offer a third path between the ailing state enterprises that account for a mere 30% of China’s output and the foreign enterprises that account for over half of the country’s exports and are increasingly making inroads in the domestic market as well.

If China is to flourish, its best hope lies not in state-owned enterprises, which still rely on government support and subsidized credit, but with a group of entrepreneurs such as Mr. Zhang. This group, which barely existed a decade ago, has had great successes, but they often lack the discipline and experience to build lasting business empires.

The article goes on to distinguish Mr. Zhang from most Chinese entrepreneurs because his company produces a product, rather than brokers product sales or develops real property:

Unlike Mr. Zhang, 70% of the richest private entrepreneurs in China are property developers, says Morgan Stanley’s Mr. [Andy] Xie. Most of those who aren’t developers are essentially traders, buying and selling goods and companies. By contrast, Mr. Zhang makes things for which there is demonstrable demand. At the same time, he is an indirect beneficiary of the real-estate boom, because many of his customers are developers.

Most interestingly, Broad’s cooling systems cost more than those from Korea and Japan and Broad does not seek to compete on price:

Moreover, while most manufacturing in China is all about economies of scale that result in the lowest price, Mr. Zhang says he doesn’t compete by undercutting competitors. He says his products are more expensive than those of competitors in Japan and Korea. The equipment used is world class and imported to his Broad factory from all over the world. Mr. Zhang is also unusual in that he is focused on the long term. By contrast, “most entrepreneurs see investment as detracting from profits,” says X.D. Yang, co-head of buyout firm Carlyle Group’s investments in Asia. “They only draw up one-year budgets. They don’t build their companies to last for years and years.”

With energy conservation one of China’s top priorities, the orders for Broad’s “environmentally correct cooling systems” are rolling in.

Mr. Zhang also handles his finances very differently from the typical Chinese entrepreneur:

In a world where capital has never been priced realistically, and, until recently, loans were considered government disbursements rather than debt that had to be repaid, Mr. Zhang is careful about how he seeks financing. “He is the only one I have ever met in China who has not asked me to get him money through Goldman,” Mr. [Fred] Hu adds.

Mr. Zhang pays his taxes and refuses to pay bribes, even though that refusal has cost his company certain contracts.  The article is not clear whether the contracts Broad missed out on by refusing to pay bribes were domestic or foreign.

I found the statistic that China’s state owned entities (SOE) contribute only 30% to China’s GDP interesting.  It is always unclear what is meant by a state owned enterprise in China, but the generally accepted definition does not include city owned companies. I recently read an article noting how much more efficient China’s private sector is than its state sector and how the private sector is growing at a much faster pace because of this.  I am often asked why China is not moving faster in privatizing its large state owned enterprises. My stock answer is that it does not need to do so, as so many of its state owned enterprises are eminently capable of self-destructing.  Unless Beijing interferes with private enterprise to slow it down, I see the role and influence of state owned enterprises continuing to shrink under its own weight.

My own law firm’s experience bears out what the Wall Street Journal says regarding the general unwillingness of most Chinese companies to think long term.  Certainly, we have found this to be true with respect to legal services.  All of the Chinese lawyers with whom I have discussed this topic agree that, with very few exceptions, Chinese companies will avoid using lawyers until a crisis necessitates it.  This contrasts with the prevalent western view that using lawyers is like changing the oil in your car; one pays for both to avoid the far worse alternative — having to buy a new engine or facing litigation.  As Chinese entrepreneurs gain business experience, and as their confidence in the staying power of Chinese capitalism increases, I believe their thinking will become more long term as well.

For more on the rise of capitalism/entrepreneurship in China, check out  “China Rising” at Samizdata Blog, which sees Chinese capitalism growing by small steps and “Top Predators,” at Blood & Treasure Blog, which summarizes Chinese government policy toward entrepreneurs as “not encouraging, not openly promoting, and not being quick to ban.

Newsweek International just ran a story, entitled, “China’s Golden Cities,” [link no longer exists] on the preliminary results of a World Bank study indicating China’s cities are doing much better than widely believed, and not just those cities on the coast.  The study is based on a survey of 12,400 Chinese companies in 120 Chinese cities, and though the data is just beginning to be analyzed, “a number of patterns quickly emerge.”  I see this study as at least partially vindicating my posts on how Western analysts assessing China’s economy and future fail to account for the growth and dynamism of China’s private sector.

The study found “no link between fast growth and the breeding of corruption or pollution” and it also found “China’s transition to a market economy appears to be both more advanced and somewhat less damaging than we thought.”  Though only 8 percent of the randomly sampled firms are “majority state-owned,” those firms “control one third of the assets in the sample,” suggesting a “larger private sector than previous estimates.”

The study also surprised those who undertook it by revealing a positive correlation between a strong private sector and decreased corruption:

Not only was the extent of the private sector a surprise to those conducting the study, but the benefits from this were also:

But in the cities where the private sector flourishes, firms reported far less red tape from faster times through Customs to fewer days dealing with bureaucracy and less frequent demands for bribes.

While corruption is inherently hard to measure, we get pretty good response rates on the question of whether firms have to pay bribes to get loans from commercial banks, which are still largely state-owned. In southeast cities such as Hangzhou or Xiamen, 1 to 2 percent of firms report paying bribes to gain loans; the figure is above 10 percent in more than 20 cities of the center and west.

What explains these differences? Being near the coast is a help in China, because of access to external ideas and because coastal areas were permitted to experiment with reform first. An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou’all were industrial backwaters in 1978, and responded to China’s opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.

In addition to the correlation between a strong private sector and reduced corruption, the study indicates a “good investment climate for firms also goes hand in hand with a good environment for people:”

As expected, cities with better investment climates tend to have higher wages (averaging $3,000 to $4,000 a year in coastal cities, versus $1,000 in the interior), less unemployment, lower infant mortality and higher education spending. But surprisingly, they also score higher on environmental measures such as green space per capita, clean-air days per year and percent of water discharge that is treated. For example, cities like Weihai, Qingdao, Suzhou, Hangzhou and Fuzhou all score very highly in terms of business climate, and all treat 97 percent or more of their industrial waste water, with Weihai treating a perfect 100 percent.

The opposite is also true. The average waste water treatment rate for cities with poor investment environments was about 78 percent. Why is this so? Cities with poor investment climates tend to have industry dominated by state firms, which often are the worst polluters.

As my eight year old would say, “duh.”

As we put it in a recent post,”private enterprise is thriving and it is China’s private companies (not its state owned entities) that drive what the show [China Rising] kept calling the “greatest transformation in history.”  Yes, China’s government is indeed a relatively agile one, and yes, there are still many state owned entities (SOEs) in China, but as is the case in just about every economically thriving country in the world, the private sector fuels the growth.

It is also can be no accident that corruption will tend to be lower where the private sector is relatively strong as compared to the public sector.  After all, the public sector is the sine qua non for corruption.  The correlation between wealth and a clean environment should also not surprise.  Put simply, Copenhagen can afford a state of the art sewage system; Freetown, Sierra Leone, cannot.

The bottom line here should hardly need to be stated:  as China’s private sector continues to increase and as China continues to become wealthier, its livability will improve.

For those interested in how such improvements might eventually affect China’s politics, go here, here [link no longer exists], here, and here.

Business and consumer lending in China is behind that in the West and its lack of development hinders both China’s small and medium enterprises (SMEs) and the development of a consumer society.  China does not have good credit databases on either consumers or businesses and its heavily regulated banks are reluctant to lend money to businesses that are not large or state owned enterprises (SOEs).

Chinese SMEs needing short term funds are often forced to borrow from pawn shops and unregulated underground lenders at extremely high rates, according to a recent Reuters News Service article.  Pawn shops in China thrive by “meeting the demand from small firms and individuals for short-term loans that China’s banks, with their focus on lending to big state-owned firms, traditionally ignore.”  The article notes that many banks view private firms as “too risky a proposition since they do not have state backing.”  Xie Bin, head of financial research at a Chinese think-tank, says the boom in pawn shop loans speaks “volumes about the failure of China’s banks to price risk properly and provide decent services to small businesses.”  According to Mr. Xie, “small firms borrow from pawn shops only when they have no way out, because they must pay very high interest.” Pawn shops typically charge 3.2 percent per month on loans secured by property and 4.7 percent per month on other loans. The benchmark bank lending rate is 5.58 percent per year.

Pawn shops and underground lenders give SMEs “few-questions-asked loans in just two to three days, compared with two-three months at banks.”  Underground lending (this does not include pawn shops) is estimated to at 950 billion yuan, or 7 percent of GDP and 6 percent of all lending in China. China now has more than 1,000 pawn shops.

The Hong Kong Standard had an article today, entitled, “Betting on Credit,”on how the Czech Republic’s leading financial services company, PPF Group, hopes to offer consumer loans in China for electronics and appliance purchases.  PPF was a pioneer in consumer finance in Eastern Europe and it believes its experience with Eastern Europe’s transition from socialism to capitalism gives it special insight into China.  PPF is convinced its consumer focus is timely since many mainlanders are coming to view China as needing to increase its domestic consumption to lessen its dependency on foreign direct investment (FDI) and exports for growth. 

PPF has already successfully “road-tested” its consumer finance model in newly capitalist Russia and “it is eager to try it out in China, where the household savings rate is nearly 50 percent and the home appliance market is worth 280 billion yuan per year, but where the idea of buying on credit is still unfamiliar to most:”  Since PPF launched its Russian business in 2002, almost seven million people have borrowed from it and forty percent of Russian home appliance purchases are now financed, whereas before PPF’s entry, all such transactions were in cash.

PPF faces a big hurdle in seeking to replicate its Eastern European experiences in China: foreigners are not allowed to conduct consumer finance activities on their own.  PPF intends to solve this problem by buying into mainland banks and it is in talks with two lenders — Chengdu City Commercial Bank and Deyang City Commercial Bank. China does not allow any one foreign company to own more than 20 percent of a city commercial bank and the ceiling on combined foreign ownership is 25 percent.  PPF hopes to conclude its negotiations with the two banks quickly, possibly in time to open a consumer finance business before the end of this year.

In China’s larger cities, PPF plans to work with big appliance retail chains such as Gome and Suning.  In its smaller cities, however, PPF plans to market its loans through the appliance manufacturers.  In December, PPF signed an agreement with Changhong Electronics, one of the mainland’s top TV makers, to set up a consumer loans joint venture.

PPF claims its financing has increased appliance sales by over 30 percent in Eastern Europe and it anticipates the same increases in China.  PPF asserts it will be “introducing a risk management concept that is new to China – different interest rates according to individual creditworthiness.”  Personal borrowers generally borrow from banks at the same interest rate, regardless of their credit history or borrowing capacity.

The government owned People’s Bank of China recently announced [link no longer exists] its intention to establish a nationwide credit database on corporate borrowers by the end of June, 2006  This database will be shared by all commercial banks and some rural credit cooperatives.  At the same time it announced this database, It also urged banks to make a “special effort” to help SMEs build up their credit histories, so it will be easier for them to access loans in the future.  A rudimentary personal credit database recently came into existence.

Many large international banks, including Bank of America, HSBC, and Citibank, have already made large purchases of interests in Chinese banks in anticipation of expected end of year liberalization of China’s foreign direct investment (FDI) laws relating to financial institutions.  The continued influx of foreign banks will eventually change lending in China.

But in the meantime, borrowed Yuan will be hard to find.