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The Chinese regime's credit-tightening policy has forced small and medium-sized enterprises in Wenzhou to turn to underground lending and loan sharks. (AFP/Getty Images)
A serious financial crisis is underway in China's entrepreneurial hub of Wenzhou in the eastern province of Zhejiang, with a private lending frenzy sweeping throughout China.
The Chinese regime's credit-tightening policy has forced small and medium-sized enterprises in Wenzhou to turn to underground lending and loan sharks. Many business owners are on the run, and at least one has committed suicide after failing to resolve his debts.
Bosses on the Run
Twenty-five business owners have gone into hiding in September alone, bringing the tally of such cases to more than 80 since April, according to a Sept. 29 report by state media Economic Information Daily.
These are relatively big and reputable companies that desperately needed operating capital but were turned down by regular banks. Hence they were forced to borrow from private lenders with interest rates sometimes as high as 180 percent, Zhou Dewen, chairman of Wenzhou's Small and Medium Enterprise Development and Promotion (SMEDP), told Voice of America.
“Some of the companies completely or partially shut down operations after their owners fled,” Zhou said.
Three of the runaway business owners each left more than 1 billion yuan (US$156.79 million) in unpaid debts.
The disappearance of Hu Fulin, founder of one of China’s biggest eyeglass makers, Zhejiang Center Group, especially sent shockwaves through the local business community. Hu has incurred debt of 2 billion yuan (US$312.57 million), with 1.2 billion yuan being from private lenders.
Private Lending Craze
The private lending market in Wenzhou has been in overdrive. With about 110 billion yuan (US$17.24 billion), it amounts to 20 percent of Wenzhou's bank loans, according to information from the Central Bank's Wenzhou branch.
In fact, the private lending frenzy is sweeping through all of China and includes regular banks, as well as large, listed, non-financial companies, and even individuals from all walks of life.
Total deposit outflow from regular banks to the private lending market has been around 3 trillion yuan (US$470.37 billion) during the first three quarters of this year, according to Liu Mingkang from China’s Banking Regulatory Commission.
Sixty-four listed, non-financial companies, 90 percent of which are state-owned enterprises, have invested 16.9 billion yuan (US$2.65 billion) in private loan lending.
In Ordos, Inner Mongolia, 50 percent of residents are involved in underground lending, whereas in Wenzhou, 89 percent of families and 60 percent of businesses are engaged in similar activities.
Modern Express, a Jiangsu newspaper, reported in July on what it called a “BMW town” in northern Jiangsu's Sihong County. Ninty-eight percent of the residents there were involved in private lending schemes since the beginning of 2011, the report said. Although the town's average income is less than that of northern Jiangsu as a whole, some residents used their newly acquired cash to purchase luxury cars, including BMWs, hence the town's nickname.
State media reported a case of a Wenzhou woman by the name Shi Xiojie, who has been running several trust companies and has borrowed nearly 1.3 billion yuan (US$204 million) from individual lenders, 80 percent of whom are city officials.
High Risk
Ms. Li, who works for a foreign company in Shanghai, told The Epoch Times that her parents have deposited about one million yuan (US$156,800)--their entire life savings and money they made from selling a house--into a small private lending company in Wenzhou, at a 2 percent monthly interest rate. This investment brings them an additional monthly income of 20,000 yuan (US$3,000).
The deal was so sweet that her parents then applied for a secured loan of 800,000 yuan (US$125,000) from a regular bank on another house they owned, and invested the money with the same private lender to earn extra cash, Li said.
Like Li's parents, many ordinary Chinese have been pouring money, including their life savings, into the underground lending market.
With a growing number of people getting caught up in the craze, an increase in private lending disputes has also sprung up recently.
Zhou of Wenzhou's SMEDP, believes that things will get worse. He estimates that 40 to 50 percent of companies in Wenzhou may have to completely or partially shut down by the end of the year.
Social Unrest
The collapse of the private lending industry can also lead to the disruption of China's entire financial system and to major social unrest.
With bank money flowing into the private lending market, the capital chain will gradually grow longer. Once the borrowing companies cannot repay the loans, it will eventually hit the banks, and more economic entities will be impacted, which can trigger a Chinese-style sub-prime crisis, according to an analysis by Guangzhou Daily.
Creditors might also take extreme measures to try and get their money back.The headquarters of Wenzhou Jinchao Electrical Appliances were ransacked by creditors in late August after the owner fled Wenzhou.
On Sept. 24, thousands of protesters, creditors and employees of the bankrupt eyeglass maker Zhejiang Center Group, took to the streets in Wenzhou, demanding payment of their salaries and investments.
