Bad Loans Surge In Chinese Underground Banking System21 July, 2011, 16:39. Posted by Zarathustra
Tags: Banking, Economy, PMI
As the People’s Bank of China tightens monetary policy, small and medium size businesses are now unable to obtain credit from the formal banking system. As a result, earlier I mentioned that many small businesses are now getting credit from the underground banking system. These lenders include pawnshop and loan sharks, which charge unreasonably high interest. It will only be a matter time to see troubles associated with these underground loans.
FT Beyondbrics has a post on the issue of bad debts in the underground banks. The investigation found that there have been some increases in non-performing loans among 50 underground banks they surveyed. This is hardly surprising, as interest rates they are charging can be as high as 8% per month (i.e. almost 100% per annum), it is hard to see how these businesses can be alive. With rising exchange rate of Chinese Yuan, surging labour and material costs, now these businesses are facing surging financing costs. It would be surprising if none of these businesses fail.
Today, we have also got the really ugly China flash PMI estimate from HSBC. At 48.9, this is within the contraction territory. No doubt that the Chinese economy is slowing down amid monetary tightening.