Who is really borrowing?
Although small business owners have trouble applying for loans from commercial banks, the percentage of total money lent by banks to small-medium business owners has in fact increased in 2011, according to a study by the Institute of World Economics and Politics at the Chinese Academy of Social Sciences. So, if small business owners are not the driving force in the expansion of private loan sharks, then who is?
It turns out the public is actually quite familiar with the answer, a subject that has attracted much attention recently, as well as heavy criticism: high-speed rail projects.
China plans to invest 3 to 4 trillion yuan ($465-620 billion) in its high-speed rail network between 2011 and 2015, according to a report by Xinhua News Agency earlier this year. Another report released by Guangfa Securities last month showed that 13 completed high-speed rails had cost 589.8 billion yuan, while 26 are under construction and another 23 are on the waiting list, which will cost another 849.1 billion.
Zhang Hongbo, an analyst at Citic Securities Co, said the high-speed railway projects have been heavily dependent on loans and debt financing since 2008.
It is no secret that state-owned infrastructure projects like railways and highways are funded by loans from banks, Zhang said. For example, loans to such projects comprise more than 40 percent of the total lending from Agricultural Bank in Sichuan Province.
According to Zhang, banks are willing to lend money to projects that are backed by local governments, who normally refinance land to the banks for development.
But the land-for-loan deal has become unsustainable, especially since the People's Bank of China, the central bank, has raised the deposit/reserve ratio several times this year.
"We are sitting on a volcano," said He Zhicheng, senior economist at the Agricultural Bank of China.
Local governments will face 4 trillion yuan in debt payments next year, and they're not able to even pay the interest rate, He said. It will cause a landslide in the stock market, because most commercial banks in China are listed.
"The bad debt rate will increase five times higher than now," He pointed out. As a result, banks will sell the property and lands they own, leading to a fall in the real estate market.
