Chinese companies with good credit ratings make big money by borrowing from banks and lending the money to business that unable to obtain credit from legitimate lenders. Picture: A bank. (File Photo/CNS)
China's underground loan market may threaten the stability of its economy, according to the 21st Century Business Herald.
The nation's tight monetary policy has forced cash-starved businessmen to gray-market lending. Meanwhile, businesses with bad credit histories are turning towards those with good credit, such as well-established companies or government employees, to borrow money.
Companies or individuals with good credit histories are thus engaging in sub-loans, whereby they take out loans from banks and lend them at 10% higher interest rates to those turned down by banks.
In the city of Wenzhou in eastern China, the epicenter of the private loans industry, such practices are threatening the city's economy as well as the stability of the society.
According to the 21st Century Business Herald, Wang Hexia, the owner of Wenzhou Jubang Shoes, has been missing since July 27. An internal report from the Longwan District Shoe Industry Association of Wenzhou City, published earlier this month, revealed that Wang's disappearance was linked to his ties to an illegal mortgage company.
"There was no sign at all. It was as if the problem just emerged overnight," people within the association said of Wang's involvement with the illegal firm.
Wang invested heavily in an illegal mortgage company and was forced to close down his business after it failed miserably.
The case is nothing new in the region. A local policeman said three corporations filed for bankruptcy within half a month. Ten corporations have gone bankrupt so far this year. The local police department meanwhile is stepping up its efforts to maintain security.
The owner of Wenzhou Baoye Synthetic Leather was also reported missing earlier this month. The firm has been operating since the 1990s. Sources at a local bank said Baoye was struggling with the high premiums on underground loans.
"It is quite obvious that in Wenzhou, too many people borrow money from others. As lenders feel the pinch of unavailability of cash, sub-loan interest rates may continue to grow," a source at Agricultural Bank of China said.
Meanwhile, the sub-loan business has resulted in major disputes in the region. The People's Court of Yueqing in Wenzhou has handled 636 cases related to private loans. Total outstanding loans have touched a dangerous high of 269 million yuan (US$42.06 million), said the source.
References:
Wenzhou Jubang Shoes 溫州巨邦鞋業
Wenzhou Baoye Synthetic Leather 溫州寶業皮革公司