Shadow banking, P2P lending, and pyramid schemes: Lucy Hornby on China’s gray economy


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This week on Sinica, Kaiser speaks with Lucy Hornby, the deputy bureau chief of the Financial Times in Beijing and a veteran guest on the show. She has appeared on Sinica before to discuss professional representation for women in China, the last surviving comfort women in the country, and domestic environmental challenges.

The two discuss shadow banking in China and its history; the cat-and-mouse relationship between regulators and shadow financiers; the advent of fintech and the proliferation of peer-to-peer (P2P) lending platforms; and Lucy’s reporting on a pyramid scheme involving selenium-infused wheat in Hebei.

What to listen for this week on the Sinica Podcast:

11:15: Lucy responding to Kaiser’s question on perceptions of shadow lending in China: “You see repeated attempts by the Chinese state to shut this down. And also the words that they use around it: shadow banking, private banking, private financiers, capitalists… They’re very much painted in a negative light. But at the same time, some of China’s biggest entrepreneurs have said they would never have gotten started or been able to make it through a downturn [without a shadow loan].”

13:02: Lucy points out that in the lead-up to the financial crisis of 2008, the state took control of building housing from private investors: “This cutoff in loans [to private entities] happened roughly around the time you had the global financial crisis and the Chinese government putting out a massive stimulus plan…and suddenly if you can make a 30 percent profit on something, you can take out a 20 percent loan… That’s when you really had this explosion of shadow banking that reached into every sector of the economy.”

30:35: “The other thing I think a lot of people don’t realize is that Chinese shadow financing has flowed into peripheral countries… A lot of Mongolian entrepreneurs turn to that shadow financing, and you even had some who then took that and repackaged it at higher rates to Mongolian retail customers. So, that means that basically the nation of Mongolia is now completely exposed to the Chinese shadow banking sector.”

42:15: To conclude the discussion, Lucy provides a bird’s-eye view: “I think your point about China’s need for flexible financing is a real one, and that’s going to continue. But I think what we’re also seeing is a massive deleveraging and default of all these boom years into the pockets of the average Chinese person.”


Lucy: Den of Thieves, by James B. Stewart, the tome-like account of the junk bond trading craze of the 1980s, and The China Dream, by Joe Studwell.

Kaiser: Two books by Stephen R. Platt: Imperial Twilight: The Opium War and the End of China’s Last Golden Age and Autumn in the Heavenly Kingdom: China, the West, and the Epic Story of the Taiping Civil War.

This podcast was edited and produced by Kaiser Kuo and Jason MacRonald.