Mainland SMEs turn to HK for cheap loans

(Ecns.cn)--The difference between Hong Kong and mainland loan interest rates has created excellent business opportunities for creditors and debtors on both sides, reveals the Southern Weekly.

Due to China's tightened monetary policies, many small and medium-sized enterprises (SMEs) in the mainland are seeking low-interest loans from Hong Kong-based companies, which take advantage of local financing platforms and borrow from banks at even lower rates.

Han Bin (alias), owner of a clothing company in Guangzhou, the capital city of Guangdong Province, once owed 10 million yuan to a local bank, on which he had to pay nearly 2.5 million yuan in interest every year.

"I almost lost my temper when I was paying off the debt at the bank, and the president asked me how much I had earned," Han told the Southern Weekly, adding that the profit his company yielded annually was only enough to service the loan.

But after hearing from a friend that interest rates in Hong Kong are much lower, Han registered a shell company there and used it to get cheap loans from a local asset management company.

"I was planning to borrow HK$30 million using my factory in Guangzhou and part of my stakes in the company as collateral," he added.

With an annual interest rate of 12 percent, Han concluded that the total loan interest is less than half the amount he paid to mainland banks.

Yet to transfer the loans back to the mainland, Han must establish a joint venture with his Hong Kong-based shell company as the investor. All the loans will then be wired to the venture as its registered capital.

Han's way of getting loans in Hong Kong is just one of the tricks that some mainland companies are playing, reveals the Southern Weekly, noting that other methods include false trading and backdoor deals with underground banks.

With such a promising niche market, some Hong Kong companies are also trying to get involved in the lending business with mainland SMEs, mainly focusing on providing small loans with money borrowed from local banks at competitive rates.

According to the Southern Weekly, the Bank of East Asia provides unsecured loans of up to HK$1 million at rates of 0.55-0.75 percent a month. A similar program could also be found at Hang Seng Bank.

"Some Hong Kong companies, including First Credit Holdings Limited (a money lending company) and Aeon Credit Service (a leading consumer finance services companies), are taking this opportunity to make tidy profits by taking out low-interest loans from banks and lending them to mainland companies at higher rates," Han Bin pointed out.

Han just received a HK$2 million loan at a monthly interest rate of 2 percent, which, according to him, "is higher than that at the banks, but still quite low compared to the rate of 6 percent charged by the loan sharks."

Mainland enterprises listed in Hong Kong also have a competitive edge in the lending business by having easy access to both Hong Kong capital and mainland companies that are struggling financially.

Credit China Holdings Limited, a professional financing organization, has set up two small-loan companies in Shanghai and Chongqing, which resulted in increases of 143 percent in annual gross revenue and 121 percent in net profit.

Yet underground banks are still the most convenient channels for mainland companies to acquire private loans, noted Han.

"The phenomenon of mainland companies turning to Hong Kong for loans will continue to exist because of the difference between interest rates in Hong Kong and the mainland," analyzed Wen Tianna, a manager at China Merchants Securities (HK) Co. Ltd.

In 2011, the People's Bank of China (PBOC), the country's central bank, raised interest rates and banks' reserve requirement ratio several times in a bid to check excessive lending and curb soaring inflation.

Outstanding loans to small firms grew 26.6 percent year-on-year to hit 9.85 trillion yuan (US$1.55 trillion) at the end of July, rising faster than the total outstanding loans of Chinese banks, Xiao Yuanqi, an official from the China Banking Regulatory Commission (CBRC), told Xinhua News Agency.

"But it (the statistics) does not touch upon the huge gap between actual bank loans and SMEs' financing needs or whether the banking sector has narrowed that gap," China Daily commented in an editorial.