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Wednesday, 12 October 2011
The sting in the honeypot
Business owners flocked to illegal underground banks in the good times, but now the high interest rates and slowing economy are strangling them and threatening to cause the mainland’s private sector to collapse
Business owners flocked to illegal underground banks in the good times, but now the high interest rates and slowing economy are strangling them and threatening to cause the mainland’s private sector to collapse
Daniel Ren in Shanghai 06 October 2011
When times were good, practically everyone was happy with the rise of the mainland’s makeshift banks.
Owners of private businesses could get loans that were difficult to coax from state-owned banks. Investors got stupendous returns for putting their money in them. Officials ignored the banks’ illegality, or even invested their own money, because the economy was humming.
But now that Beijing has tightened credit to combat inflation, the economy has turned. Many businesses can’t pay the exorbitant interest that the underground banks demand.
The toll is financial - and tragic. In Wenzhou in eastern Zhejiang province, known as the capital of the nation’s private sector, more than 80 debt-ridden entrepreneurs have fled since April, according to the Xinhua subsidiary Economic Information Daily. And that number, according to several Zhejiang businessmen, is just a small portion of the bosses who have run away after falling victim to the loans they took out from the underground banks.
“These days, news about the disappearance of a debt-ridden business owner is no news at all here,” the owner of a Zhejiang maker of car parts, Qian Kang, said. “Now the ball has been kicked to the authorities, because things are getting even worse if no proper action is taken to address the problem.”
The sorry saga reached a climax early this week when Shen Kuian, the head of a Wenzhou shoe factory who was saddled with 400 million yuan (HK$489 million) in debt, jumped off a building and killed himself, Xinhua reported.
The suicide followed the flight of Hu Hulin, chairman of spectacles-maker Zhejiang Xintai Group, on September 22. He owed 2 billion yuan, the 21st Century Business Herald reported.
In response to the deepening crisis, Wenzhou officials, including Communist Party Secretary Chen Derong, convened forums to tackle the problem, but business leaders just lashed out at the authorities and the talks went nowhere.
Although underground banks - also called “private lending businesses” - are illegal, 2.6 trillion yuan flowed through them nationwide, according to a report by the central bank, Economic Information said.
In Zhejiang, one of the mainland’s most affluent regions, the illegal banks amassed at least 600 billion yuan, according to state-owned National Business Daily.
The underground banks, usually run by powerful tycoons, raised funds from people before granting high-interest loans to small businesses or individuals. Thousands of private businessmen borrowed money to buy materials and pay workers after securing orders from overseas.
As Wenzhou-made shoes, clothes, lighters and leathergoods stormed overseas markets, entrepreneurs touted the illegal businesses as an efficient tool to help them strike it rich. Entrepreneurs tended not to call the illegal banks “loan sharks” because they appreciated the banks’ help in developing their businesses.
With the economy booming, local government officials did not try to shut the banks down, but looked for ways to make their own profits.
Xinhua has cited the case of Shi Xiaojie, who said about 80 per cent of the depositors in her 800-million-yuan illegal lending business were local government officials.
Despite the free-wheeling atmosphere, some economists were raising red flags. Professor Li Youhuan of the Guangdong Academy of Social Sciences, the mainland’s most renowned economist on fund flows, said the government officials turned a deaf ear to several years of researchers’ warnings. “It is now at a critical moment, since a capital crunch is causing damage to thousands of privately owned businesses,” he said. “The sky-high black market interest rates mean that nearly all borrowers will eventually go bust.”
Mainland banks, mostly state-owned, have long been reluctant to extend credit to privately owned firms because their focus was on government-controlled companies. Their bias against small businesses provided an opening for the private lenders, which found plenty of cash-rich depositors eager to invest in something that would yield higher returns than regular banking interest.
The banking sector, according to analysts, is overregulated, adding another obstacle to small businesses in need of loans for operations and expansion. Under China’s laws and regulations, only licensed banks, credit co-operatives and small loan firms can grant loans to companies and individuals.
Local police and regulators rarely crack down, believing the underground banks, though illegitimate, play a positive role in complementing the overregulated banking sector.
However, anecdotal evidence indicates some of the borrowers from the underground banks have been using the money for gambling and other illegal pursuits.
“It has long been a time bomb and could explode any time,” the entrepreneur Qian said. “The officials might have known the problem well, but they were comfortably turning a blind eye to it.”
The crisis broke out after Beijing and state-owned banks tightened credit last year to combat stubborn inflation. The monetary tightening curbed infrastructure and real estate construction, slowing the economy. That affected private companies’ businesses, which also faced other pressures: inflation, which forced companies to spend more on raw materials, and the global recession, which slowed export orders. Depositors had less money to put into the banks.
This year, black market interest rates in Zhejiang have surged to as high as 10 per cent a month - about 20 times the benchmark rate set by the central bank.
Nevertheless, some entrepreneurs said they had to resort to the underground banks to solve cash-flow problems if the money was to support a highly profitable deal.
But Professor Li said the unreasonably high interest rates demanded by the loan sharks portended a potential collapse of the mainland’s private sector.
Few businesses could generate returns of 120 per cent a year, he said, and the borrowers could be destroyed by the loan sharks once they were exposed to business difficulties.
In July, the All China Federation of Industry and Commerce, the official chamber of commerce for non-state companies, submitted a report to the State Council warning that 7.5 million small and medium firms were confronting a predicament even worse than in 2008, when the global financial crisis began.
The report was based on a three-month survey of private businesses in 17 province-level regions. But the officials denied rumours that a rising number of privately owned companies had gone bankrupt, an apparent effort to avoid civil strife.
Huang Mengfu, the federation’s chairman, told a conference that Premier Wen Jiabao had read the report and passed it to the relevant ministries, but they had not taken any serious steps to bail out the ailing private sector.
2 comments:
The sting in the honeypot
Business owners flocked to illegal underground banks in the good times, but now the high interest rates and slowing economy are strangling them and threatening to cause the mainland’s private sector to collapse
Daniel Ren in Shanghai
06 October 2011
When times were good, practically everyone was happy with the rise of the mainland’s makeshift banks.
Owners of private businesses could get loans that were difficult to coax from state-owned banks. Investors got stupendous returns for putting their money in them. Officials ignored the banks’ illegality, or even invested their own money, because the economy was humming.
But now that Beijing has tightened credit to combat inflation, the economy has turned. Many businesses can’t pay the exorbitant interest that the underground banks demand.
The toll is financial - and tragic. In Wenzhou in eastern Zhejiang province, known as the capital of the nation’s private sector, more than 80 debt-ridden entrepreneurs have fled since April, according to the Xinhua subsidiary Economic Information Daily. And that number, according to several Zhejiang businessmen, is just a small portion of the bosses who have run away after falling victim to the loans they took out from the underground banks.
“These days, news about the disappearance of a debt-ridden business owner is no news at all here,” the owner of a Zhejiang maker of car parts, Qian Kang, said. “Now the ball has been kicked to the authorities, because things are getting even worse if no proper action is taken to address the problem.”
The sorry saga reached a climax early this week when Shen Kuian, the head of a Wenzhou shoe factory who was saddled with 400 million yuan (HK$489 million) in debt, jumped off a building and killed himself, Xinhua reported.
The suicide followed the flight of Hu Hulin, chairman of spectacles-maker Zhejiang Xintai Group, on September 22. He owed 2 billion yuan, the 21st Century Business Herald reported.
In response to the deepening crisis, Wenzhou officials, including Communist Party Secretary Chen Derong, convened forums to tackle the problem, but business leaders just lashed out at the authorities and the talks went nowhere.
Although underground banks - also called “private lending businesses” - are illegal, 2.6 trillion yuan flowed through them nationwide, according to a report by the central bank, Economic Information said.
In Zhejiang, one of the mainland’s most affluent regions, the illegal banks amassed at least 600 billion yuan, according to state-owned National Business Daily.
The underground banks, usually run by powerful tycoons, raised funds from people before granting high-interest loans to small businesses or individuals. Thousands of private businessmen borrowed money to buy materials and pay workers after securing orders from overseas.
As Wenzhou-made shoes, clothes, lighters and leathergoods stormed overseas markets, entrepreneurs touted the illegal businesses as an efficient tool to help them strike it rich. Entrepreneurs tended not to call the illegal banks “loan sharks” because they appreciated the banks’ help in developing their businesses.
With the economy booming, local government officials did not try to shut the banks down, but looked for ways to make their own profits.
Xinhua has cited the case of Shi Xiaojie, who said about 80 per cent of the depositors in her 800-million-yuan illegal lending business were local government officials.
Despite the free-wheeling atmosphere, some economists were raising red flags. Professor Li Youhuan of the Guangdong Academy of Social Sciences, the mainland’s most renowned economist on fund flows, said the government officials turned a deaf ear to several years of researchers’ warnings. “It is now at a critical moment, since a capital crunch is causing damage to thousands of privately owned businesses,” he said. “The sky-high black market interest rates mean that nearly all borrowers will eventually go bust.”
Mainland banks, mostly state-owned, have long been reluctant to extend credit to privately owned firms because their focus was on government-controlled companies. Their bias against small businesses provided an opening for the private lenders, which found plenty of cash-rich depositors eager to invest in something that would yield higher returns than regular banking interest.
The banking sector, according to analysts, is overregulated, adding another obstacle to small businesses in need of loans for operations and expansion. Under China’s laws and regulations, only licensed banks, credit co-operatives and small loan firms can grant loans to companies and individuals.
Local police and regulators rarely crack down, believing the underground banks, though illegitimate, play a positive role in complementing the overregulated banking sector.
However, anecdotal evidence indicates some of the borrowers from the underground banks have been using the money for gambling and other illegal pursuits.
“It has long been a time bomb and could explode any time,” the entrepreneur Qian said. “The officials might have known the problem well, but they were comfortably turning a blind eye to it.”
The crisis broke out after Beijing and state-owned banks tightened credit last year to combat stubborn inflation. The monetary tightening curbed infrastructure and real estate construction, slowing the economy. That affected private companies’ businesses, which also faced other pressures: inflation, which forced companies to spend more on raw materials, and the global recession, which slowed export orders. Depositors had less money to put into the banks.
This year, black market interest rates in Zhejiang have surged to as high as 10 per cent a month - about 20 times the benchmark rate set by the central bank.
Nevertheless, some entrepreneurs said they had to resort to the underground banks to solve cash-flow problems if the money was to support a highly profitable deal.
But Professor Li said the unreasonably high interest rates demanded by the loan sharks portended a potential collapse of the mainland’s private sector.
Few businesses could generate returns of 120 per cent a year, he said, and the borrowers could be destroyed by the loan sharks once they were exposed to business difficulties.
In July, the All China Federation of Industry and Commerce, the official chamber of commerce for non-state companies, submitted a report to the State Council warning that 7.5 million small and medium firms were confronting a predicament even worse than in 2008, when the global financial crisis began.
The report was based on a three-month survey of private businesses in 17 province-level regions. But the officials denied rumours that a rising number of privately owned companies had gone bankrupt, an apparent effort to avoid civil strife.
Huang Mengfu, the federation’s chairman, told a conference that Premier Wen Jiabao had read the report and passed it to the relevant ministries, but they had not taken any serious steps to bail out the ailing private sector.
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