Chinese Firms Tapping Informal Loan Networks

From News, cover, issue no. 364, April 21, 2008
Translation by Ren Yujie
Original articles: [Chinese]

With few other options to save his business, Zhang Wei ultimately had to borrow two million yuan from a Wenzhou shoemaker in order to tie over the difficult times.

Squeezed by the Chinese government's tighter macro economic policy since the latter half of 2007, Zhang found difficulty in securing loans while facing rising costs and other market pressures. More troubling is that Zhang's was not an isolated case.

The All-China Federation of Industry and Commerce said there were Chinese private businesses starving for loans in Chongqing, Zhejiang, Jiangsu and Jiangxi Provinces, and recent research revealed that they were increasingly turning to the cash-strong Wenzhou business communities for a lifeline.

"In Zhejing province, Wenzhou is the bank," said Zhang.

Wenzhou, a provincial city in southern China and populated by roughly seven million people, has one of the highest per-capita earnings in the country. Its merchants have invested heavily in major economic sectors nationwide, and they are widely known for their foresight in Chinese business.

Underground fund-raising gaining momentum
Research by the Federation estimated that Chinese companies raised some 800 billion yuan through informal channels last year, among which researcher Chen Yongjie said over 20 billion yuan likely came from Wenzhou.

Businesses that raised money in this fashion would likely be charged a 5% monthly interest rate, amounting to around 60% in one year.

According to Chen, over five million private businesses made up 70% of China's total, making up 65% of China's GDP.

But despite the importance of this segment to Chinese industry, Chen's data indicated that the proportion of loans from banks to them decreased over the past three years. The proportion of short-term loans to private business was about 11% in 2005, but only 9% in 2006.

China Society of Private Economic Research chairman Bao Yujun had spent two weeks investigating in Shaoxing, Wenzhou and nearby regions, and discovered that underground fundraising was indeed gaining momentum in Wenzhou.

Despite the fact that underground fundraising goes against regulations made by financial supervisory bodies in the Chinese central government, the local governments were turning a blind eye.

Bao spoke with a prominent politician of one city in Zhejiang who stressed that there was no way they could clamp down because businesses had to survive and that locals had to remain employed.

Bao summarized the four major problems private businesses faced as: restricted development due to land controls; stronger cost pressures tied to raw materials; lower export profits due to foreign trade tax regulations and the yuan's appreciation; and funding shortages due to tight domestic macroeconomic policy.