Chinese city sets limit on non-bank lenders' rates; takes steps to halt flight of troubled businessmen
The authorities in the bellwether city of Wenzhou in China have moved to try and fix a credit crunch that has prompted at least 26 debt-laden business owners to flee.
The south-eastern coastal city - well known for its freewheeling entrepreneurial spirit and regarded as the cradle of private-business ownership in the country - has set an upper limit on the rates private non-bank lenders can charge borrowers.
The measure was clearly aimed at the rampant underground loans market where private lenders charge interest rates of 25per cent.
Private non-bank institutions can now lend only at an interest rate that does not exceed four times the country's benchmark rate, said the statement dated Sept28. China's benchmark one-year fixed deposit rate now stands at 3.5per cent.
'For loans that continue to have rates exceeding the limits, the debtor can refuse to pay the excess,' the government said.
The municipal government has also warned loan sharks against using violence to collect debts.
Banks have been ordered to issue 100 billion yuan (S$20billion) of new loans to small companies and accept loan repayment by instalments.
More than 20 owners of troubled companies have reportedly fled the city, prompting the local authorities to order tighter controls on those leaving the mainland.
The financial newspaper 21st Century Business Herald reported last week that police had escorted some back to Wenzhou after they fled to Hong Kong and Macau.
Among those who allegedly fled was Hu Fulin, owner of Zhejiang Centre Group, one of China's biggest makers of spectacles.
The Beijing News said other spectacle makers had stepped in to buy his company following government intervention.
'Who would bother repaying his debt if it was not for the government's mediation?' an unnamed source from one of the potential buyers was quoted as saying.
Hu was reported to have decided to return home to deal with a two billion yuan debt to banks and loan sharks.
Wenzhou, home to some of China's biggest producers of shoes, clothing, cigarette lighters and leather goods, is seen as a barometer of the health of the nation's private enterprises.
Private-lending disputes in the city surged 71per cent to five billion yuan in the first eight months of this year as small-business bankruptcies spread and some owners fled, according to a statement on the government's website last week.
The nation's informal lending market, which may have expanded to almost fourtrillion yuan, is the most likely short-term 'time bomb' facing the Chinese economy and can be more abrupt and damaging than the debt burdens with local authorities, according to Credit Suisse Group AG.
'It is unclear whether this 'time bomb' will go off, but we believe something is likely to happen over the next 12 months,' Mr Tao Dong, chief economist for non- Japan Asia at Credit Suisse, said in a report last week.
'Either Beijing takes proactive and decisive measures to deal with the issue beforehand, or a mini-credit crisis could occur.'
In its recent annual survey of Chinese banks, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through 'debt triangles'.
This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cash-flow problems which in turn can affect others higher up the supply chain.
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Wenzhou takes action to avert loans 'time bomb'
Chinese city sets limit on non-bank lenders' rates; takes steps to halt flight of troubled businessmen
The authorities in the bellwether city of Wenzhou in China have moved to try and fix a credit crunch that has prompted at least 26 debt-laden business owners to flee.
The south-eastern coastal city - well known for its freewheeling entrepreneurial spirit and regarded as the cradle of private-business ownership in the country - has set an upper limit on the rates private non-bank lenders can charge borrowers.
The measure was clearly aimed at the rampant underground loans market where private lenders charge interest rates of 25per cent.
Private non-bank institutions can now lend only at an interest rate that does not exceed four times the country's benchmark rate, said the statement dated Sept28. China's benchmark one-year fixed deposit rate now stands at 3.5per cent.
'For loans that continue to have rates exceeding the limits, the debtor can refuse to pay the excess,' the government said.
The municipal government has also warned loan sharks against using violence to collect debts.
Banks have been ordered to issue 100 billion yuan (S$20billion) of new loans to small companies and accept loan repayment by instalments.
More than 20 owners of troubled companies have reportedly fled the city, prompting the local authorities to order tighter controls on those leaving the mainland.
The financial newspaper 21st Century Business Herald reported last week that police had escorted some back to Wenzhou after they fled to Hong Kong and Macau.
Among those who allegedly fled was Hu Fulin, owner of Zhejiang Centre Group, one of China's biggest makers of spectacles.
The Beijing News said other spectacle makers had stepped in to buy his company following government intervention.
'Who would bother repaying his debt if it was not for the government's mediation?' an unnamed source from one of the potential buyers was quoted as saying.
Hu was reported to have decided to return home to deal with a two billion yuan debt to banks and loan sharks.
Wenzhou, home to some of China's biggest producers of shoes, clothing, cigarette lighters and leather goods, is seen as a barometer of the health of the nation's private enterprises.
Private-lending disputes in the city surged 71per cent to five billion yuan in the first eight months of this year as small-business bankruptcies spread and some owners fled, according to a statement on the government's website last week.
The nation's informal lending market, which may have expanded to almost fourtrillion yuan, is the most likely short-term 'time bomb' facing the Chinese economy and can be more abrupt and damaging than the debt burdens with local authorities, according to Credit Suisse Group AG.
'It is unclear whether this 'time bomb' will go off, but we believe something is likely to happen over the next 12 months,' Mr Tao Dong, chief economist for non- Japan Asia at Credit Suisse, said in a report last week.
'Either Beijing takes proactive and decisive measures to deal with the issue beforehand, or a mini-credit crisis could occur.'
In its recent annual survey of Chinese banks, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through 'debt triangles'.
This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cash-flow problems which in turn can affect others higher up the supply chain.
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