Chinese Businesses Turning To Shadow Banks For Loans
Please note that we are not authorised to provide any investment advice. The content on this page is for information purposes only.
With credit tightening in China, many businesses are turning to “private” lenders to overcome the credit crunch.
With the Chinese authorities clamping down on lending in a bid to cool down its overheated economy, many small and medium sized businesses are turning to private loans for their financing needs.
With credit tightening in China, many businesses are turning to “private” lenders to overcome the credit crunch.
With the Chinese authorities clamping down on lending in a bid to cool down its overheated economy, many small and medium sized businesses are turning to private loans for their financing needs.
According to data released by Shihua Financial, the total lending through what is know as “shadow banks” is about 18 percent of all bank loans in China, amounting to US$1.28 trillion, or 21 percent of China’s GDP. The Wenzhou People’s Bank estimates that 90 percent of families and 60 percent of businesses are involved in the private lending market. Currently, the annual interest rates for a private loan can be as high as 100 percent, almost 15 times China’s benchmark lending rates.
China’s shadow banks are mainly trust banks and small loan companies that provide private lending completely outside the purview of official regulation and supervision.
The issue has come into the spotlight after Chinese state news agencies report a rise in small business owners absconding after failing to repay their private loans. According to a China Daily report, 190 cases dealing with private lending disputes where filed in Shanghai courts for the month of September.
On September 21, Mr. Hu Fulin, owner of one of the biggest eyeglasses manufacturer in Wenzhou was reported to have fled after being unable to finance his debts. A senior official from the Wenzhou district government confirmed Mr. Hu’s disappearance and that “current information has proved that he borrowed about 130 million yuan (US$20.3 million) from private lenders”.
“The collapse of underground banking system will be the worst consequence for the private money lenders and borrowers in Wenzhou if the troubles with cash-flow are not solved,” said Chen Gongmeng, chairman of the Wenzhou Strategic Investors Federation.
However, Fu Bingtao, an analyst at China’s second largest bank, Agriculture Bank of China, believes that the risks to China’s economy can be contained since the banking system is relatively insulated from such loansharking activities.
In June, the China Banking Regulatory Commission issued a directive to instruct banks to boost credit to small businesses, and to tolerate a higher ratio of bad loans related to small and medium enterprises. According to the CBRC, bad loans to SMEs hit 239.5 billion yuan (US$37.4 billion) in April, with the total loans to SMEs at 9.45 trillion yuan (US$1.47 trillion).
