The Great Escape From The Unbearable Burden Of Credit27 September, 2011, 12:09. Posted by Zarathustra
Tags: Debt Crisis, Economy, Underground, Wenzhou
As China’s monetary policy tightened, I noted that credit from the formal banking system has become difficult for some companies, particularly for the small- to medium- sized businesses. As a result, these companies are increasingly relying on underground credit, which includes things like loan sharks and pawnshops. These underground banking system usually charge very high interest rates (in the order of tens of percentage points per annum), which are quite unsustainable. The risks in this area of credit have been very well flagged months ago here (e.g., here, here and here). With high interest rates and potentially questionable credit quality here, it would be a surprise if there is no problem here.
Recently the problem starts to surface, as some of these businesses owners flee. In Wenzhou, it seems that even selling off their real estate isn’t enough to help their financial situation. Last week, Shanghai Daily ran with a story with the title “Subprime crisis sweeps Wenzhou as bankrupt bosses flee”, The Shanghai Daily story wrote:
The east China city of Wenzhou is battling its own subprime crisis after seven local business owners fled recently, leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan.
Most of the runaway bosses who have disappeared since September 12 are in the manufacturing industry, according to today’s National Business Daily. Each of them had borrowed hundreds of millions of yuan from banks and private creditors.
Businesses in Wenzhou are facing unprecedented challenges, with rising costs and slowing economic activities impact their cash flow cycle. Waves of bankruptcies are happening, and business owners are running away. Today, Sina ran a story, suggesting that 9 business owners ran away on 22 September alone in Wenzhou as they can’t repay the debts. The story also highlighted that bank deposits are shrinking as depositors are attracted by higher rates of interests these underground banking system is able to offer.
With unbearably high interest rates charged on borrowers and questionable credit quality, the development is hardly a reassuring one.