(Ecns.cn)--Many Wenzhou businessmen fled abroad or disappeared between April and September because they were unable to pay back their huge private loans. Now the Pearl River Delta, a hub of small and medium sized enterprises (SME) has its own troubles with the private loan market.
Incidents of loans becoming overdue are a growing phenomenon in Guangdong Province today, reports the Guangzhou Daily. Industry experts say the market is typically cash-strapped as the year closes, and warn that Guangdong's market runs the risk of being infected by Wenzhou's credit crisis.
Disputes over dear money
A number of disputes centered on private loans have made it to court in Shenzhen in recent years, but the number and the amounts of money involved are spiking this year, according to relevant data. It is common to see lawsuits involving unpaid private loans in the tens of thousands, or even millions, of yuan.
These private loan cases have the following characteristics in common: the sums involved are huge, the trials involve charges of usury, and the judgments are difficult or impossible to execute, reports the Shenzhen Special Zone Newspaper.
The private loan boom was accompanied by a newly emerging professional lender group, Shenzhen Special Zone Newspaper goes on to say. These private creditors, who make their living lending money to people, have become regulars at different levels of the court system. "A lender often has several defaulters and brings multiple law suits to court," said a local Shenzhen judge.
The First People's Court of Zhongshan City confirmed that by September 30 it had already scheduled the same number of hearings for private-loan disputes as it heard in all of 2010.
Chinese law stipulates the interest rates for private loans shall not exceed four times that of the same category of loan managed by the banks. It was reported by Zhongshan Daily on November 8 that some professional lenders are familiar with laws and regulations, and familiar as well with how to disguise usury under a legal cloak.
In the said contracts, lenders would offer a formal interest rate not exceeding four times the bank interest rate, and then proceed to convert the extra interest into principal, penalties and other legally safe forms. It is difficult to spot the loop holes in these cleverly conceptualized contracts.
Huge loans threaten financing
The private loans at stake currently amount to tens of billions of yuan in the Pearl River Delta, it was learnt by reporters from Economic Information Newspaper. "Underworld loans dealing" has become sophisticated, and in addition, data show the growth of deposits in banks began to decline to different levels in many cities of the Pearl River Delta in the first five months of the year.
In Guangdong Province, private loans not only flow into the real economy but are also invested in the real estate of third and fourth-tier cities. Housing prices in these cities have also dropped to different levels. "If the private loan chain has a weak link, it might be the real estate sector." said Li Youhuan, the director of Guangdong Social Science Research and Development Center.
Li added the capital chain may prove to be dangerously fragile by the end of the fiscal year because that time is commonly chosen to settle accounts. Private business owners often secure loans for each other. Once a single enterprise stumbles, the whole community will be in danger.
Referring to Wenzhou mode
The real economy's growth relies on abundant capital supplies, argued Sun Lijian, the vice president of Economy College, Fudan University. He added that under the current tightening monetary policy, the SMEs face difficulties drumming up financing. Normally, SMEs eager for money pair up with private capital seeking customers, needs that quite naturally bind both sides.
A sound mechanism for private credit to bridge loans over lenders and customers has become a hot discussion topic. Wenzhou, the eye of the private loan storm that gathered strength in September, is now a pioneer on the trail to find reasonable financing solutions for SMEs.
Wenzhou's regional financing reform essentially aims to help SMEs walk out of the financing crisis, and at the same time build Wenzhou into a center of private capital funding.
It plans to establish 120 petty-loan companies within three years, with a registered capital of 80 billion yuan to fully cover each town in the region. In addition, rural financing institutions will be increased to 30 unites, and rural cooperative banks will be reorganized into a shareholding system. Most notably, Wenzhou intends to establish flexible loan rates which can be negotiated by creditors and borrowers under existing laws.
