A bigger vicious circle
Most of the companies apply the capital to short-term shortages of circulating funds. Because "the policies to loan from banks were restricted, civil sources have provided most of the capital for small company functions," said Zhou Dewen, chairman of a local mid- and small-sized company association.
Expert analysis showed that during the current phase when most small firms are still stabilizing and nourishing their businesses, capital turnover is on top of the agenda.
Regarding another proportion flowing to individuals, stock and real estate markets are the two main destinations of their investments. In the city of Erdos in Inner Mongolia, civil loan sums have climbed to 200 billion yuan, a considerable amount of which could have entered the property market.
Apart from "full-time" lenders, parts of the loans were given out by public companies. However, the mortgages might have already been hypothecated to the banks.
Wenzhou has registered over 1,000 companies profiting by means of bonding, investment, consignment, and pawning. Many of these large-coverage financing intermediaries are involved with illegal trading or are practicing in grey zones.
Bubbles will finally burst. Along with the international and national economic climate changes, domestic rises of labor costs and raw material expenses, RMB appreciation, and heavy tax burdens in recent years, vulnerable capital chains of these small entities have broken or even crashed.
The despair of these firms is not simply the end of their stories, but will strike a heavy fist on all the mentioned sectors, like a domino effect. This is likely to result in emptying out of the local economy in Wenzhou, or many local economies around the country.
An imbalanced thirsty financial ecology
In general, civil loans are still under control. So far, about 20 to 25 small- and mid-sized companies went broke of the more than 70,000 of its kind in Wenzhou. The problem is social influence. Two scores of similar cases is not a number that can be easily disregarded.
An official document from the Central Bank has clearly defined the range of legal usury within four times that of loans from financial institutions. No doubt, the situation in Wenzhou has already crossed the line.
Yet now is not the right time to immediately impose radical reforms on the civil loan market.
Companies were driven to turn to the civil loaners by high bank thresholds. If this capital source were cut or restricted, another way to survive must be provided. Or, they will go broke as well and maybe even faster. As the snowball grows, risks increase at the same time.
"Administrative means can't cope with the dilemma," says Wu Xiaobo, a renowned writer on finance and economics. The key lies in credit barriers for the real economy. After the issue is settled, irrational usury rates will drop naturally.
Cao Fengqi, director at the Research Center of Finance and Stock, Peking University, pointed out that the solution is "to diversify financial service institutions and lower the thresholds to set-up a private financial organization. Civil loans should be legalized and included in governmental financial supervision."
