Private Lending at High Rates Growing in China

September 24, 2011 1:59 am Last Updated: September 24, 2011 1:59 am

Just a day after the International Monetary Fund voiced its concerns over the slumping stocks of China’s banks, China’s state-run media revealed that significant amounts of deposits in four major state-owned banks are finding their way to private lending markets.

The state-run China Securities Journal, citing unnamed sources, reported on Thursday that in the first 15 days of September, outstanding deposits in the Industrial & Commercial Bank of China, China Construction Bank, Bank of China, and Agricultural Bank of China fell 420 billion yuan (US$65.7 billion), an amount of money that analysts and banking sources cited in the report believe to have flown to the high-yield, private lending market.

The private lending market, which offers borrowing rates about 10 times higher than the official deposit rates, has grown rapidly in recent months due to tightening government regulations on bank lending and strong borrowing demand from small businesses.

According to the state-run Southern Daily report, private lending has grown considerably among small- and medium-sized companies as well as individuals throughout China. In its Aug. 30 report, the newspaper said that private lending has grown popular from the southeastern coastal province of Zhejiang all the way to the Ordos in Inner Mongolia, even including the poverty-stricken Sihong County in northern Jiangsu Province.

Just in Ordos alone, half of the residents are involved in either lending or borrowing, a recent Inner Mongolia University study found. Similarly, in China’s southern Pearl River Delta, one of the main hubs of China’s economic growth, individuals who find no better way to use their cash also turn to private lending despite the potential risks.

"Many state-run enterprises, listed companies, and even commercial banks have also been involved in the promotion of private lending," Guo Tianyong, professor and director of the Research Center of the Chinese Banking Industry at the Central University of Finance and Economics, told Southern Daily. "Private lending," Guo predicted, "is very likely to lead to a sub-prime mortgage crisis in China."

Zhou Bingqing, a prominent Internet intellectual property lawyer, told The Epoch Times that the turn to private lending is inevitable considering today’s banking system in China.

The Internet has helped popularize such lending, according to Zhou, as the Net serves as a platform for gathering lenders and borrowers.

Zhou noted that state-run banks, with their low deposit interest rates that have not adjusted to the soaring inflation, naturally have driven many bank customers to move their cash to private lending institutes, which offer higher interest rates. Pursuit of profits is the nature of capital; likewise, that is the nature of individual cash, said Zhou.

Some small- and medium-sized companies, on the other hand, have been finding it difficult to borrow enough funds from state-owned banks. The government’s new regulations tend to favor lending money to local governments, real estate investments, and state-run companies, but they, too, seem to pump the money directly into the private lending market.

"Companies, especially state-run companies, that are able to obtain cash from banks, usually have low production efficiency nowadays," he said. "Since they are unable to put their easily obtained capital to good use, they find it easier to just earn profits from the borrowing and lending rates."

Zhou said while individual lenders need to be careful of bad debt, the amount of bad debt in state-run banks is much higher than that of individual lenders. "It’s the Chinese state-owned media that is trying to cook things up," Zhou said. "It is just that the banks are always able to write off their bad debts with government subsidies or taxpayers’ money. Civilians will never know how much bad debt the banks have."

Read the original Chinese article.

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