Eureka Correspondence

Chinese shadow banking, SMSF alternatives, and major bank blues.

Shadow banking in China

Should we be concerned about the apparent increasing concern by international economists about the level of “shadow banking” in China and the credit fuelled investment boom? Investor George Soros this week labelled it “a debt disaster that’s unfolding in plain sight”. Alan has in the past raised concerns about this issue. If it is of concern, what strategies might we employ to mitigate any future Chinese fallout?

Name withheld

Adam Carr’s response: Thanks for your letter. I wrote a piece on whether China is facing a banking crisis in November last year. The analysis I presented in that piece suggests China’s banking system is sound, which you can hold equally for the shadow banking system. In short, separating China’s financial system from the government treasury is not possible – China is still very much a centrally controlled economy. With that in mind it’s important to note that non-performing loans are low in China. Secondly, China’s government balance sheet is very strong with small deficits and low debt. Moreover, what debt they do carry is largely a symptom of their very large foreign exchange reserve holdings. As a result the government could easily deal with any financial problem – however caused.

Choosing to run a SMSF

Although I do a fair bit of personal investing, I’m not sure I also want to run an SMSF given I have a very demanding career and don’t have a lot of free time.

I’m constantly dissatisfied with the performance of my super fund and the advice provided by my financial adviser, but I’m not sure where to go from here.

I fear just switching advisors will be more of the same - lots of fees, for very little service and consistently poor performance.  Would I be better just investing in an industry fund?

Thoughts as to possible options would be much appreciated.

SK

Bruce Brammall’s response: Thanks for your letter. It sounds like you want to have some more control over your super, but without necessarily setting up a SMSF and dealing with the extra work that it can involve. While I don’t know how much money you have in super, or how much time you think is too much, there are options for taking control of your super without having to take on all of the responsibilities of starting and running a SMSF.

Sure, you can switch to an industry fund if you wish. You might save something in fees, but you will have no guarantee in performance.

If you have some experience in your own personal investment, you might wish to have a look at this article I wrote, which talks about the sort of control you can get from wrap services. You get a wide selection of direct shares and managed funds to be able to make investment decisions yourself (which it sounds like you want), but you don’t have to deal with the paperwork and other management. It’s a half-way step to a SMSF.

Banks, small businesses and property

In relation to the difficulties facing young people in getting access to credit from banks as well as in property (see Thawing the first-home market and Helping the next property generation), I thought you may be interested in my experience with a major bank. First some background.

My son and his wife have started up a restaurant that I have been providing capital for.

It occurred to me that they should start to get involved with bank lending facilities. I thought that a $30,000 overdraft for this small business with no liabilities other than me and a nine month history of sustainable trading should not be a problem. However, the bank manager told me that the interest rate for their business would be 13% or 14%. He also said the bank are happy to finance property at 5% for investment, on interest only loans for five or even 10 years. That also shocked me, as it is my recollection that even before the GFC, when credit was easy, they would require capital repayments to commence after five years of an interest only deal. So no wonder investors are pushing the property market up!

Someone really should kick the big four banks and cause them to support small business and enterprise in Australia. Why should we continue to tolerate them sitting smugly in their lazy oligopoly, distorting the property market and making it nearly impossible for first homebuyers to join in and young people building a business to access a bit of credit at a fair rate. If the property market does fall over by 10% or 20% it will once again be the small investor/first homebuyer who has their equity wiped out.

Name withheld