China’s Underground Lending Saga: Henan Edition31 October, 2011, 19:53. Posted by Zarathustra
Tags: Economy, Shadow Banking System, Underground lending
Just as the European crisis seems to be stabilising for a few days and as equities around the global rebounded on some not-disappointing-but-not-good-at-all data, the on-going problem in China shadow banking system has gone and been solved after government pledged to ease selectively.
Except it isn’t solved. Rather, the problem spreads, unnoticed.
According to Sina, underground lending in Henan is now in deep trouble. Shengwo investment guarantee company was established in September of 2010, with capital of CNY 50 million. Using high yield investment products, the company has attracted money in the order of billions. According to the report, this company has failed to keep up with interest and principal payments since mid-September as it is rumoured to be running into cash flow problem.
As this company failed and as the underground lending problems surfaced in Wenzhou, investors of these companies in Henan became worried and demanded early redemption. Just like in a bank run, this made matter worse. The boss of another investment company, Baoyin Investment, has disappeared for a while as he has apparently been kidnapped (sort of) by the clients of the company who have money invested, fearing that he would run away (just like the Wenzhou bosses). And he has not only been kept in the dark by clients for once, but for twice.
Soon after, another company, Xintongshang, with capital of CNY110 million, failed. The company took money from investors and invested into finance, real estate and automobile. On 19 October, the company failed to make interest and principal payments, and few hundred investors demonstrated outside the company office.
Isolated cases? Perhaps. But the problems of underground lending are still here.