Chinese Consumers Using Credit Cards for “Shadow Banking”

May 15, 2014, Written By Bill Hardekopf
Chinese Yuan

If you need quick cash in China, you don’t have to apply for a loan with the central bank. All you need is a credit card and a store willing to take part in a process called “shadow banking.”

China recently intensified its rules and regulations for lending money due to a decline in the economy. As a result, some businesses are having to go through unconventional measures to get the cash they need. That is why some are turning to shadow banking, and it is making some businesses big bucks.

With shadow banking, a person from a business will go into a store and “purchase” a variety of items. When it comes time to pay for the items, the business swipes a credit card like a normal transaction. However, the store hands over cash instead of the items the business was purchasing. The business then has cash in hand that is disguised as items that have been purchased. The store in this scenario would take out a small fee for its services, usually around 1%.

In some cases, the withdrawn cash is used to pay off the balance on another credit card, which helps effectively maintain an interest-free loan. For people who only have one card, the stores will often offer ultra-short-term loans to cover their balance with the understanding that the people will come back and use their cards again once the money clears the account–effectively opening up a chance for zero interest borrowing again.

Shadow banking has become a major concern in the Chinese economy. According to a Chinese think tank called the Chinese Academy for Social Sciences, the size of China’s shadow banking sector is valued at 27 trillion yuan, or nearly $4.4 trillion in U.S. dollars.

Shadow banking is nothing new, but it is becoming a prominent issue in Beijing. The central bank is doing their best to control the money in the country, but consumers are simply finding ways around the rules.



The information contained within this article was accurate as of May 15, 2014. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.