Chinese Black Market for Loans Imploding

October 3, 2011

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Ah yes, Wenzhou, where you can find rates on loans in the tripple digits. Wenzou has been leading China in creative financing schemes, filling the void by Chinese banks. The credit crackdown by the central government over the past couple years has resulted in banks lending mostly to those people with connections or companies controlled by the government. Naturally, loans in the shadow banking system are going bad. Check out this story from Mish.

China Loan Shark Market Crashes; Scores of Chinese Business Owners Unable to Pay Black Market Loans Commit Suicide or Disappear

  • Private loans account for 70% of financing, with about 89% of families/individuals and 59% of companies in Wenzhou participating in such “private loan” schemes
  • Note that Wenzhou is one of riches cities in China (No. 3 in disposable income per capita), and is considered the “Birthplace of China’s Private Economy”
  • Since April this year, Wenzhou, missing more than 80 business owners, the company closed, the event staff pay talks, since September alone, there are up to 25 cases
  • Some sharks can reach up to 180% per annum

Check out this fascinating live auction for loans, where people bid for access to capital at higher and higher interest rates, and this story describing how one loan shark operates. This is what happens when interest rates are held below the inflation rate by the government, while the market is flooded with paper. We can expect mini versions of such loan sharking here in the US the longer the Fed continues on the path of keeping interest rates below the inflation rate.

The Chinese government came out with a “solution” to the problem over the weekend. They capped interest rates in the private market. Unfortunately, this will exacerbate the problem and accelerate the process of loans going bad. Price caps will create a shortage of credit since it will not compensate lenders for the risks taken.

Less you think the banks are safe since they have government backing, historically, the SOE’s have not felt the need to pay back those loans, even if at below market interest rates.

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