China’s underground lenders, like their recognised counterparts, have seen a surge in business in recent weeks as the credit crisis widens and mainland companies, big and small, grapple with the economic slowdown.
Yuan loans extended by mainland banks surged 445 per cent to 476.9 billion yuan (HK$541 billion) last month from a year earlier, according to the central bank.
In Wenzhou, where some of the country’s biggest underground lenders operate, a similar trend is being seen. Zhou Dewen, chairman of the Wenzhou SME Development Promotion Federation, estimates that 5 billion yuan entered the underground system as investors divested plants, property and other projects recently, making about 25 billion yuan available for loans to small and medium-sized enterprises.
Though yet to be legitimised, underground lenders have become more integral to the operations of cash-strapped SMEs, which used to absorb 85 per cent of the 20 million people entering the job market each year.
Beijing announced in May that special companies would be allowed to set up to provide small loans on a trial basis, with a pilot project in Zhejiang.
With the deepening crisis, expectations have been escalating that Beijing will move faster to legitimise the underground banking system to boost lending to hard-hit small businesses.
However, some analysts believe that any substantial breakthrough remains distant, owing to concerns about implementation at the local government level and inadequate legal and administrative structures.
In fact, the programme is no different from a scheme launched in 2001 in select northern areas to help farmers, in which the lenders were still prohibited from taking deposits.
But in its last circular, issued in May, the China Banking Regulatory Commission did not specify loan uses and left it to local governments to lay down the detailed rules for the companies’ establishment, operation and termination. It also said once the companies proved themselves capable of operating well over several years, they could be upgraded to a village or township bank.
At a State Council meeting on December 3, Beijing announced nine financial measures to boost the economy. Underground lending occupied the fifth point, and the leaders struck a cautious note by saying they would “regulate and develop” the underground financing sector.
“It shows that the central government is still on guard,” said Professor Guo Tianyong at the Central Financial and Economic University in Beijing. “It put loans from financial institutions, merger loans, real estate investment and trust funds and equity investment funds ahead of underground lending in terms of priority.”
The credit company scheme attracted great interest from individuals and companies across the country, especially in Wenzhou, where illegal lenders controlling an estimated 60 billion yuan sought the chance to legalise their business.
Companies in other sectors were also enthusiastic to acquire a financial institution licence, which could mean easier access to funds, a broadened business scope and increased attention from capital market investors.
But from an examination of the situation in Wenzhou, the first city for the trial, the scheme faces implementation problems, and underground lenders are worried it will be tough to get a foot in the door.
“In the past few months, the small-loan programme was a frenzied topic. Owners of all kinds of businesses were frantic about it,” said Mr. Zhou of the Wenzhou SME federation, which has more than 1,000 member companies. “Once the Wenzhou government announced the requirements for the companies, many were disappointed.”
The Zhejiang government has given Wenzhou - the cradle of the mainland’s private economy and a centre of world manufacturing - a quota of 16 companies, the highest number allowed for any area in the eastern province.
The provincial government requires the founders to be local backbone private companies and to choose partners to set up limited liability companies with registered capital of at least 50 million yuan or joint-stock companies with at least 80 million yuan.
Interest in the scheme was so overwhelming that in July the Wenzhou government had to raise the capital threshold and restrict the initial candidates to manufacturers.
After meticulous evaluation of profitability, assets, tax records and other aspects, authorities announced on August 28 that it had chosen three companies to launch the scheme. Two will form small lenders with registered capital of 100 million yuan and one with registered capital of 200 million yuan.
“From the central government to the city government, the threshold was raised step by step. Underground lenders can hardly get involved because most of the loan guarantee firms, pawnbrokers and investment companies who are lending illegally are relatively small-scale. Unless they can persuade the initiators to let them join in, the door will be closed to them,” Mr. Zhou said.
Borrowing and lending is part of daily life in Wenzhou; millions of yuan change hands in the city, and underground lenders play a big role.
Once a good investment opportunity is detected, about 600 billion yuan can be mobilised in a short period, based on estimates of bank deposits of residents and companies, according to Mr. Zhou.
Zhejiang limits a single client’s outstanding loans to no more than 5 per cent of the lender’s capital, or 10 million yuan if registered capital is 200 million yuan. The lender should set aside 70 per cent of the capital for small borrowers in loans of no more than 500,000 yuan each.
“Why should 30 per cent of the capital be set aside for big borrowers? It is against the central government’s spirit of helping as many small companies as possible. The programme was initially well intended but has gone awry,” Mr. Zhou said.
Manufacturing companies are particularly keen on the business. Huafeng Group, one of the three approved initiators in September, said it was interested in gaining experience in the financial sector.
But another approved initiator in Zhejiang found the scheme “a hot potato”.
“It’s about face. Many companies are trying to snap up the quota, and if you don’t follow suit, people think you are not a quality company,” said the businessman. “We got the go-ahead, but the problem is where do we find our partners? We have about 60 million yuan, but the small lenders should have registered capital of at least 100 million yuan.
“Also, I have to lend 70 million yuan to small companies, at no more than 500,000 yuan each. Interest rates can be no higher than four times the central bank’s rates. It’s a troublesome business that’s not lucrative.”
The company ran out of funds to lend within a month after it started operation in October, sources said.
Mr. Zhou said Wenzhou SMEs needed more than 220 billion yuan of funding, and the loan companies’ small registered capital meant there were not enough funds to go round.
Wenzhou Loan Guarantee Federation chairman Guo Zhichao said the manufacturers “have to learn to swim in the vast sea of the financial market”, and the possibility of failure was high. “Some of my friends said they were eyeing the potential to be upgraded to a village and township bank. But according to law, only banks can initiate village banks,” Mr. Guo said.
CBRC Jiangsu bureau head Yu Xuejun said the prospects of the small lenders becoming banks were remote. “Unless they sell a stake to banks, the companies cannot be turned into banks,” Mr. Yu said.
The small lenders were to be set up by the end of October, as required by the Zhejiang government. Guangdong authorities were working on a similar programme.
Analysts have doubts about the scheme, which will neither be overseen by the central bank nor the CBRC, because the companies are not banks.
“The scheme does not give the companies the status of financial institutions. They cannot absorb deposits. There are restrictions on the loan amount to a single client. Under these requirements, the companies’ development is restricted,” said Zeng Gang, a banking researcher at the Chinese Academy of Social Sciences.
“On the policy front, China hasn’t worked out a mature legal framework for these companies. The central bank and the banking regulator are unwilling to take on the responsibility to govern them. So the environment does not support rapid development of the business.”
1 comment:
Underground Banks in Legal Twilight Zone
Trial scheme to legitimise operations hits bumps
Jane Cai
16 December 2008
China’s underground lenders, like their recognised counterparts, have seen a surge in business in recent weeks as the credit crisis widens and mainland companies, big and small, grapple with the economic slowdown.
Yuan loans extended by mainland banks surged 445 per cent to 476.9 billion yuan (HK$541 billion) last month from a year earlier, according to the central bank.
In Wenzhou, where some of the country’s biggest underground lenders operate, a similar trend is being seen. Zhou Dewen, chairman of the Wenzhou SME Development Promotion Federation, estimates that 5 billion yuan entered the underground system as investors divested plants, property and other projects recently, making about 25 billion yuan available for loans to small and medium-sized enterprises.
Though yet to be legitimised, underground lenders have become more integral to the operations of cash-strapped SMEs, which used to absorb 85 per cent of the 20 million people entering the job market each year.
Beijing announced in May that special companies would be allowed to set up to provide small loans on a trial basis, with a pilot project in Zhejiang.
With the deepening crisis, expectations have been escalating that Beijing will move faster to legitimise the underground banking system to boost lending to hard-hit small businesses.
However, some analysts believe that any substantial breakthrough remains distant, owing to concerns about implementation at the local government level and inadequate legal and administrative structures.
In fact, the programme is no different from a scheme launched in 2001 in select northern areas to help farmers, in which the lenders were still prohibited from taking deposits.
But in its last circular, issued in May, the China Banking Regulatory Commission did not specify loan uses and left it to local governments to lay down the detailed rules for the companies’ establishment, operation and termination. It also said once the companies proved themselves capable of operating well over several years, they could be upgraded to a village or township bank.
At a State Council meeting on December 3, Beijing announced nine financial measures to boost the economy. Underground lending occupied the fifth point, and the leaders struck a cautious note by saying they would “regulate and develop” the underground financing sector.
“It shows that the central government is still on guard,” said Professor Guo Tianyong at the Central Financial and Economic University in Beijing. “It put loans from financial institutions, merger loans, real estate investment and trust funds and equity investment funds ahead of underground lending in terms of priority.”
The credit company scheme attracted great interest from individuals and companies across the country, especially in Wenzhou, where illegal lenders controlling an estimated 60 billion yuan sought the chance to legalise their business.
Companies in other sectors were also enthusiastic to acquire a financial institution licence, which could mean easier access to funds, a broadened business scope and increased attention from capital market investors.
But from an examination of the situation in Wenzhou, the first city for the trial, the scheme faces implementation problems, and underground lenders are worried it will be tough to get a foot in the door.
“In the past few months, the small-loan programme was a frenzied topic. Owners of all kinds of businesses were frantic about it,” said Mr. Zhou of the Wenzhou SME federation, which has more than 1,000 member companies. “Once the Wenzhou government announced the requirements for the companies, many were disappointed.”
The Zhejiang government has given Wenzhou - the cradle of the mainland’s private economy and a centre of world manufacturing - a quota of 16 companies, the highest number allowed for any area in the eastern province.
The provincial government requires the founders to be local backbone private companies and to choose partners to set up limited liability companies with registered capital of at least 50 million yuan or joint-stock companies with at least 80 million yuan.
Interest in the scheme was so overwhelming that in July the Wenzhou government had to raise the capital threshold and restrict the initial candidates to manufacturers.
After meticulous evaluation of profitability, assets, tax records and other aspects, authorities announced on August 28 that it had chosen three companies to launch the scheme. Two will form small lenders with registered capital of 100 million yuan and one with registered capital of 200 million yuan.
“From the central government to the city government, the threshold was raised step by step. Underground lenders can hardly get involved because most of the loan guarantee firms, pawnbrokers and investment companies who are lending illegally are relatively small-scale. Unless they can persuade the initiators to let them join in, the door will be closed to them,” Mr. Zhou said.
Borrowing and lending is part of daily life in Wenzhou; millions of yuan change hands in the city, and underground lenders play a big role.
Once a good investment opportunity is detected, about 600 billion yuan can be mobilised in a short period, based on estimates of bank deposits of residents and companies, according to Mr. Zhou.
Zhejiang limits a single client’s outstanding loans to no more than 5 per cent of the lender’s capital, or 10 million yuan if registered capital is 200 million yuan. The lender should set aside 70 per cent of the capital for small borrowers in loans of no more than 500,000 yuan each.
“Why should 30 per cent of the capital be set aside for big borrowers? It is against the central government’s spirit of helping as many small companies as possible. The programme was initially well intended but has gone awry,” Mr. Zhou said.
Manufacturing companies are particularly keen on the business. Huafeng Group, one of the three approved initiators in September, said it was interested in gaining experience in the financial sector.
But another approved initiator in Zhejiang found the scheme “a hot potato”.
“It’s about face. Many companies are trying to snap up the quota, and if you don’t follow suit, people think you are not a quality company,” said the businessman. “We got the go-ahead, but the problem is where do we find our partners? We have about 60 million yuan, but the small lenders should have registered capital of at least 100 million yuan.
“Also, I have to lend 70 million yuan to small companies, at no more than 500,000 yuan each. Interest rates can be no higher than four times the central bank’s rates. It’s a troublesome business that’s not lucrative.”
The company ran out of funds to lend within a month after it started operation in October, sources said.
Mr. Zhou said Wenzhou SMEs needed more than 220 billion yuan of funding, and the loan companies’ small registered capital meant there were not enough funds to go round.
Wenzhou Loan Guarantee Federation chairman Guo Zhichao said the manufacturers “have to learn to swim in the vast sea of the financial market”, and the possibility of failure was high. “Some of my friends said they were eyeing the potential to be upgraded to a village and township bank. But according to law, only banks can initiate village banks,” Mr. Guo said.
CBRC Jiangsu bureau head Yu Xuejun said the prospects of the small lenders becoming banks were remote. “Unless they sell a stake to banks, the companies cannot be turned into banks,” Mr. Yu said.
The small lenders were to be set up by the end of October, as required by the Zhejiang government. Guangdong authorities were working on a similar programme.
Analysts have doubts about the scheme, which will neither be overseen by the central bank nor the CBRC, because the companies are not banks.
“The scheme does not give the companies the status of financial institutions. They cannot absorb deposits. There are restrictions on the loan amount to a single client. Under these requirements, the companies’ development is restricted,” said Zeng Gang, a banking researcher at the Chinese Academy of Social Sciences.
“On the policy front, China hasn’t worked out a mature legal framework for these companies. The central bank and the banking regulator are unwilling to take on the responsibility to govern them. So the environment does not support rapid development of the business.”
Post a Comment