With more restrictions levied by mainland authorities to tackle soaring home prices, along with a tightened money supply, China is experiencing a meteoric rise in private high-interest lending – much of it usurious.
(Ecns.cn) -- "An annual interest rate of 9.5% for a loan? That's insane!" said the director of a private-equity project. For him, the insanity is not that the rate is too high. On the contrary, "There was a client asking me to raise 50 million yuan ($7.8 million) in emergency funding to buy some land; the interest rate I gave him was 40%."
Affected by the US-originated financial crisis which began in 2008, small business owners in China have become short on capital as banks under tightened monetary standards have a limited lending capacity. To solve the problem, the government has enlisted the help of the private sector by opening the lending market to small-sum loan (SSL) companies.
The idea is not complicated: each SSL has multiple investors who create a seed fund of no more than 200 million yuan. The company is then required to lend 70 percent of its money in small sums to small businesses.
But the lending market has exploded, with many interest rates far higher than those charged by SSLs.
The private and often usurious lending business has become pervasive in the Chinese loan market, expanding from East China's coastal regions to inland areas like the Inner Mongolia Autonomous Region and Shaanxi Province, with increasingly higher interest rates. Some private companies even lend money at a 100% rate, according to a report in the Xinmin Weekly.
The craze
Formerly impoverished Sihong County in East China's Jiangsu Province recently drew attention after web users posted an article revealing more than 2,000 luxury-brand cars, including BMWs and Audis, running its streets.
So what's the secret? Simple, nearly every resident in the county is in the high-interest lending game. From farmer to doctor, teacher to public servant, everyone's a loan shark.
Hua Wei, professor at the Financial Institution of Shanghai-based Fudan University, said the booming business reflects an almost inflexible demand for loans against the limited capacity of the formal bank lending system, according to a Global Times report.
China's State-run banks had a planned cap on lending set at 75 trillion yuan in 2010, but by the end of October last year more than 92 percent had been used up.
"Small companies and factories in small cities are the main borrowers," Hua said. "Their total registered capital is maybe a couple of million yuan or even lower, and the liquidity they need is almost at this level.
"That makes it very difficult for them to borrow money from banks. First of all they must go through a very complicated application process, and second, most of these companies have a very fast cash flow so they can't wait that long," Hua added.
Such difficulties have guaranteed business for many credit companies.
"We give them an annual interest rate of 24%. Deducting the rate for the banks, customers can earn up to 16% interest. It is better than any investment," an insider at one credit guarantee company said.
