China: When Banks Stop Lending, Go To A Loan Shark Or Stop Production16 May, 2011, 15:33. Posted by Zarathustra
Besides going to a pawnshop for financing, another option is to go to a loan shark when banks stop lending.
China Federation of Industry and Commerce’s survey suggested that small and medium sized companies are in serious financial troubles, as reported by Apple daily. Small and medium sized businesses are facing tightened liquidity and higher costs, and more companies now are losing money.
As many companies are having serious difficulties in obtaining any credits from Chinese banks after serious of monetary and credit tightening, there increasingly have to resort to borrowing from loan sharks. The interest rates these loan sharks charge are horrendous. In Wenzhou, short-term financing (7-10 days) can charge 8-10% per month, while financing for 3 months or more can charge 3-5% per month. In Guangdong, one lender charges as high as 7-10% per month, or 2.6-2.8% per month for secured loans. In Xi’an, many lenders now charge as high as 30-50% per annum.
Because of all these difficulties, many small and medium sized businesses in Yangtze River delta have halted their productions or are operating in half of its capacity according to this report. According to the survey by Ministry of Industry and Information Technology, 15.8% of the small and medium sized businesses being surveyed are losing money in the first two months, and the losses increased by 22.3% compared to a year ago. Some go so far to suggest that the current situation is even worse than the financial crisis in 2008.
Unfortunately, the monetary tightening so far has yet to have any meaningful impact on inflation and real estate prices even though it has bite small and medium sized businesses (and real estate developers, local governments, etc). Perhaps the government and the People’s Bank of China may slow down the pace of tightening somewhat, but it is not very probable that they will start easing again now.