Fri, Sep 30, 2011 - Page 10 News List

China’s loan market under scrutiny

RUNAWAY CREDIT:The lending craze has seen annual rates starting at 36%, while banks compete with each other for depositors, offering holidays, tuition fees or jobs

Reuters, BEIJING

A string of Chinese entrepreneurs have gone into hiding to avoid repaying loans, according to state media reports, highlighting a credit squeeze on private firms and the dangers of steep interest rates in China’s vast and growing informal lending market.

Many cash-strapped firms are unable to borrow from banks amid a credit clampdown by Beijing, and some have turned to China’s underground lending market — which pools money from individuals and firms — at annual interest rates as high as 100 percent.

The staggering rates, at more than 15 times China’s benchmark lending rates, have pushed some firms to the limit.

In just one day last week, Chinese media reported that nine bosses of small-sized firms in China’s entrepreneurial capital of Wenzhou, Zhejiang Province, had skipped town after realizing they could not repay their corporate loans.

“The private lending craze has fueled an economic bubble, and the ‘runaway episode’ in Wenzhou is a landmark event in the bursting of such a bubble,” the official Financial News, a paper run by China’s central bank, said in a report on Wednesday.

Among the bosses who have reportedly gone into hiding is the chairman of one of Wenzhou’s prominent spectacles makers, Zhejiang Center Group Co Ltd.

The well-known firm had harbored ambitions of a public stock listing, the China Business News said, but problems started in 2008 when it was squeezed by falling overseas orders, rising raw material costs and a firmer yuan.

Citing sources with knowledge of the matter, the newspaper said Zhejiang Center owes its suppliers between 50 million and 100 million yuan (US$7.8 million to US$15.6 million). Calls to the company’s main number went unanswered.

“Seven days after his [the board chairman’s] disappearance, a few company managers are still reporting for work,” China Business News reported after a visit to Zhejiang Center’s Wenzhou office. “But they are at a loss as to what they should do now.”

Zhejiang Center’s Web site says it employs about 3,000 workers and has annual export sales of 500 million to 600 million yuan.

Chinese officials have said repeatedly that they have detected no large-scale collapses among small firms in the country and that they do not face extreme credit shortages.

That point was reiterated on Wednesday by Lu Zhongyuan (盧中原), vice head of the Development Research Center, a Cabinet think tank.

“Difficulties that small companies face are not mainly caused by tight credit,” Lu said. “The biggest problem faced by small firms is the rise in costs.”

For the wealthy in China, lending their savings to firms at annual rates starting at about 36 percent is more lucrative than putting their money in banks that give negative returns.

China’s one-year deposit rate stands at 3.5 percent, under the central bank’s inflation target for this year of 4 percent and signficantly below actual inflation, which recently has exceeded 6 percent.

A thriving underground lending market has bloomed amid savers’ zeal to put their money to better use. The central bank estimated the market was worth 2.4 trillion yuan as of the end of March last year, or 5.6 percent of China’s total lending.

“Speculative private lending has increased this year and has deviated from actual credit needs of the economy,” said Fu Bingtao (付兵濤), an analyst at Agricultural Bank of China (中國農業銀行).

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