Wenzou’s secret credit

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.

Last week, I posted on the early phases of run on property assets in Wenzou. Now, a new Caijing report suggests that underground credit in Wenzhou is booming.  According to the Wenzhou branch of the PBOC, the underground credit market has reached RMB 110 billion, and the interest rates have are 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% is used as working capital for companies and 20% is used in real estate investment and/or speculation.

Undoubtedly, monetary tightening and particularly credit tightening of the formal banking system, has pushed companies and others to obtain credit through underground channels with sky-high interest rates.  There is very little wonder that people in Wenzhou are scrambling to sell properties as credit is harder to get, or the interest rates are sky-high if you can get it.  I have no idea whether this is an isolated case in Wenzhou, or it is common 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.

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  1. China is not a Western democratic state and they don’t operate under the same rules as everyone else does… everyone seems to forget this when they compare China to other economies.

    Added to this is the fact that the Party thinks they can change the colour of the sky by decree – therefore, all they have to do in a command economy is turn the credit tap off and everything will be hunky dory.

    I can’t see this ending well if the majority of people are turning to the black market for finance.

  2. I think 25% interest rates on the black credit market (free credit market) is about right for a communist nation, with such heavy regulation and a property bubble that dwarphs Japan in 1989…

    Good read Zarathustra, cheers

  3. The reason people are turning to the black market is also coming from the fact that Chinese savers are receiving negative real rates of return by putting their money in the official banks. If they lend the money out privately, at least they can get a real return.

  4. Not to worry
    It’s probably the Bankers & the Chinese CP bigwigs who own the shadow banking system. If you’re the CEO of a bank that lends at 10% but the private enterprise lending mob you’re also running lends at 24%, you skim the extra 14%, paying 50% of that to your friendly CP official. Less bonus in the official job, but in the end it’s the same people who get the money.
    Plus que ca change….
    PS If you think this is cynical, ask yourself how anyone else in China (completely under the intense scrutiny of the ever-benevolant CP) could get away with a black market business on that scale.

  5. 24%!!! Who do these shadow lenders think they are – credit card companies or something?