One country, two credit systems (Part 2)

On the mainland by contrast, we have in some ways the opposite system. Not that the “official” interests rates reflect a market-clearing price. No, that would be too radical. The official prime rate hovers around 5%, which given last year’s 30% expansion in the money supply, hardly can be considered market-clearing.

So while scattered government guarantee schemes do exist, the standard approach to this issue is …. hold your breath…. actually market-based.

How it works: The company wishing to obtain a loan finds a “guarantor company” which is willing to “sponsor” the company to apply for a loan. This willingness is obtained at the price of several extra percent plus various other lump sum considerations.

You have to admire the practicality of the Chinese devotion to the market. Somehow – no matter how impractical the official institutional framework – they almost always seem to find a way to make a market out of it.

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One Response to One country, two credit systems (Part 2)

  1. Pingback: Electronic Currency Trading in China | Aha Moments

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