China squeeze drives boom in 'black' banks
By Olivia Chung
HONG KONG - China's smaller private companies, starved of loans as the country
tightens credit to fight inflation, are driving an underground banking boom by
turning to unofficial sources for funds to stay in business. Some are even
becoming lenders, given the prize of high returns.
About 3 trillion yuan (US$470 billion) of bank loans have been channeled into
underground lending in the eastern coastal provinces, China Banking Regulatory
Commission chairman Liu Mingkang told a recent closed-door conference with
lenders.
Large, usually state-owned enterprises, can get bank loans at a 7.2% interest
rate, compared with the one-year benchmark interest rate of 6.56%. Through
third-party companies such as
financing firms, they can then lend the money on at higher rates to small and
medium-sized companies, Liu said, according to a copy of his speech obtained by
Securities Times last week.
The funds are then lent to small-and medium-sized enterprises (SMEs) at
annualized interest rates of between 36% and 60%, the paper said.
Beijing tightened monetary policies this year to combat inflation that has
risen after 4 trillion yuan was pumped into the economy following the global
financial crisis near the end of 2008.
Year-on-year consumer price inflation in July reached 6.5%, the fastest pace in
37 months and well above the 4% government target for the year. The central
bank has raised interest rates three times this year, taking the one-year
benchmark deposit rate to 3.5% and the one-year loan rate to 6.56%. In
addition, it has increased the reserve requirement ratio for commercial lenders
six times to a record 21.5%.
The bank's measures appear to be having their effect on borrowing, new yuan
loans falling 25.2 billion yuan in July from a year earlier to 492.6 billion
yuan.
The credit tightening is hurting China's 7.5 million or so non-state SMEs,
whose predicament now is "even worse than in 2008" when the global financial
crisis began, said the All China Federation of Industry and Commerce, the
official chamber of commerce for non-state companies, after conducting a
three-month survey of private businesses in 17 regions.
Privately owned companies account for 70% of total employment on the mainland
and 60% of gross domestic product.
"Small and medium-size firms, already burdened with the rapid rise in labor
costs and the soaring price of raw materials, are facing financing problems.
Most of them are finding it difficult to survive," a federation spokesman told
Asia Times Online.
About 80% of the SMEs in Zhejiang province are using underground banking loans
to fund their businesses, even though the black market interest rates in the
province have surged as high as 10% monthly, Cai Hua, a spokesman of the
Zheshang Research Association, which represents entrepreneurs in the province,
said. Zhejiang and other eastern provinces accounted for 53% of the country's
GDP last year, according to the National Bureau of Statistics.
More than 7,300 companies in Zhejiang were forced to close from January to
April this year due to Beijing's monetary tightening measures, according to
People's Daily newspaper.
Zhejiang has about 2.4 million non-state companies with an output valued at
more than 1.5 million yuan, and abounds with underground banks for
cash-strapped small businesses. About 600 billion yuan flows through the
province's underground banking system a year, state media report.
Dodgy lenders are particularly active in Wenzhou, a Zhejiang town that has
boomed over the past three decades by producing a wide range of consumer goods
- from shoes, cigarette lighters to spectacles - whose low cost has helped to
make China the world's workshop.
Of the Wenzhou's 360,000 SMEs, 30% have cut back operations or closed their
doors so far this year, said Cai. State media have carried reports of some SMEs
borrowing from underground lenders at annualized rates of up to 120%.
"Thanks to the global economic slowdown at the end of 2008, we could hardly
receive any orders," said Li Jun, an owner of a lighter factory in Wenzhou.
"Now a few orders come back [but] we dare not accept them due to insufficient
support from banks.
"Some lighter factories just closed their companies and started a kind of
lending business, which are sure to have higher net profit rates. We are
tempted to do so," he said.
Wenzhou's underground banks last month processed 110 billion yuan, about 40%
more than the 80 billion yuan processed in the same month a year earlier and
worth about one third of the town's entire 2010 GDP of 292.56 billion yuan,
according to statistics given by the Wenzhou branch of the People's Bank of
China.
Companies are not alone in engaging in such lending businesses; individuals are
welcome to join. Liu Chumei, a housewife in Liantan town in Yunfu city, in
southern Guangdong province, close to Hong Kong, said credit companies had
promised her family a 7.5% interest rate per month on deposits of 10,000 yuan.
"Seeing the inflation rate is higher than the [official] deposit rate, we
actually loose money putting our cash in the bank ... I would put my money in
such credit companies if I had any, so I called some of my relatives in Hong
Kong to see if they were interested," she said. "They refused on security
reasons."
The high interest charged by unofficial lenders reflects more than just greed.
High risks are also involved at both local and country level.
In the case of debtors having inadequate cash flows, substantial amounts of
loans to local credit companies may become bad debts, said Yi Xianrong, a
researcher with the Institute of Finance and Banking under the Chinese Academy
of Social Sciences. That in turn poses a potential threat to the country's
stability, he said.
An underground lending market involving 300 million yuan in Xinbian and Shiji
villages in Sihong County, eastern Jiangsu province, collapsed in June, barely
three months after it was set up in March. More than 100 credit groups or
companies put their money into a common fund, which was ultimately lent to a
real estate developer surnamed Shi. The market collapsed when Shi ran into
financial troubles, prompting villagers to ask for their money back.
Unofficial banking carries the additional attraction of being useful for
laundering money - and the risk of crackdowns. An underground bank that had
allegedly laundered 56 billion yuan, in the metropolis of Chongqing, was broken
by police, China National Radio reported last week.
The criminal ring that ran the bank, comprising about 30 members in
southwestern Chongqing and Shenzhen, adjoining Hong Kong, allegedly set up
several shell companies with hundreds of employees and corporate accounts to
extend credit and launder money.
Olivia Chung is a senior Asia Times Online reporter.
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