(Ecns.cn)--Public attention to China's underregulated private loan market has come to the fore recently because runaway bosses who are unable to pay off high-interest loan debts in Wenzhou, a city well-known for its entrepreneurs, in China's eastern Zhejiang Province, are hiding from their creditors.
Since the end of 2010, the financing costs of small and medium-sized enterprises (SMEs) have kept rising because of tightened monetary policy. It has become increasingly difficult for SMEs to secure loans from financial institutions and some have turned to private borrowing. The annual interest rates of these loans may be as high as 200%, which has resulted in bankruptcy for some SMEs.
It is unlikely regulators will ease monetary policy to help alleviate the SME's tight financial situation, says a research report on China's private lending market from the China International Capital Corporation Limited (CICC).
Major banks in China are all state-owned, so loans are normally granted to large enterprises. Given current tight monetary and credit conditions, limited lending credit lines are primarily used to secure loans for state-owned and large enterprises.
Loan thresholds of banks and financial institutions are usually too high for small and mid-sized private enterprises, particularly in a time of tightened policies. While the central bank's deposit reserve ratio keeps rising, banks' lending capacities are falling. As a result, they focus on large clients to reduce lending risks and to ensure stable returns. This makes it even harder for SMEs to receive loans.
Private loans: from necessity
When private loans, which are meant to be a reasonable complement to loans from financial institutions, become the only financing source for SMEs, they evolve into high-interest loans. SMEs have no choice but to accept the higher interest rates to deal with immediate financial demands. When SMEs' owners were unable to pay for the high-interest loans, crisis finally broke out.
"Private loans cannot be prevented mainly because private enterprises have demands financial institutions cannot satisfy," Premier Wen Jiabao said during a recent visit to Wenzhou, explaining the reasons why private lending exists.
Private loans are given to enterprises in real need. In terms of economics, the efficiency of private loans is the highest of various kinds of loans.
"We need to regulate private loans to prevent risks for the purpose of healthy development. The need to regulate them and to prevent risks does not conflict with their growth," said Premier Wen.
He also set a time limit for regulators to come up with solutions. During his stay in Wenzhou, Premier Wen told officials from the Ministry of Finance and People's Bank of China to "set out policies in support of SMEs within a month."
