Interest Rates For Underground Credit In Wenzhou Surge24 August, 2011, 16:38. Posted by Zarathustra
Tags: Banking, Credit, Economy, Wenzhou
I have pointed out early on that as the People’s Bank of China tightens monetary policy, small and medium sized businesses are having a hard time borrowing from the formal banking system. As a result, many turn to the underground banking system which basically consists of loan sharks and pawnshops. Earlier, I also pointed out that bad loans in this area seems to be rising.
The latest Caijing report suggests that underground credit in Wenzhou is booming. According to the Wenzhou branch of PBOC, the size of underground credit market reached RMB 110 billion, and the interest rates have reached around 24.4% per annum, which is around 2% per month (note that we have some more horrendous rates earlier, but perhaps those were more of isolated instances rather than the overall picture). The report also suggests that 90% of households as well as 60% of companies are involved in the market. Among RMB110 billion of credit, 35% are used as working capital for companies, 20% are used in real estate investment and/or speculation.
Undoubtedly, monetary tightening, and particularly the credit tightening of the formal banking system, has pushed companies and others to obtain credit through underground channel with sky-high interest rates. Thus there is very little wonder why people in Wenzhou are now scrambling to sell properties as credits are harder to get, or the interest rates are sky-high if you can really get one. We have no idea whether this is an isolated case for Wenzhou, or it is common even for other cities, but it is clear that monetary tightening has been hurting some businesses, and the underground banking system may pose another hidden risks to the financial system and the wider economy.
So here is something to watch.