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Shadow Financing - China's Own Subprime Debt Crisis

We’re still cleaning up the mess from the massive debt-fueled housing bubble in the US when suddenly we’ve got to deal with Europe’s public finances. We haven’t even gotten started on that one when a third debt debacle starts rumbling, in China.

More than 90 businessmen have disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders in the eastern city of Wenzhou （Chinese: 温州) — renowned for its factories specializing in everything from cigarette lighters to shoes — after borrowing from private lenders at very high interest rates.

Underground lending (Shadow Financing, Chinese: 民间借贷, 民间融资) has flourished in the city and other parts of China in the past 12 months as authorities clamped down on official financing channels and major banks favored large state-owned enterprises.

China’s private lending market, known as the curb market,  is worth an estimated four trillion yuan ($628 billion) — or 10 percent of gross domestic product — fueling concerns about a potential explosion in bad debts.

Nowhere is it more developed than in Wenzhou, whose 400,000 private companies have earned the city a reputation for business savvy in a country where many big enterprises are state-controlled. The city’s credit crisis highlights some of the flaws — and potential risks — of the banking system in the world’s second-largest economy.

Guards keep watch over the factory premises of Zhejiang Center Group, China’s largest glasses manufacturer

Factory bosses in a dire credit crunch

With more than $16 million in debts she had no hope of repaying, Zheng Zhuju did what scores of other business owners in the eastern Chinese city of Wenzhou have done in recent months — run away.

Zheng was among those who flourished early on, setting up an appliance store which made her an admired businesswoman with a fleet of luxury cars.

With a trusted reputation, she borrowed from more than 300 small business owners, pooling their money and channeling it into lucrative property investments and high-interest loans to other companies.

As China’s economy slowed, however, the scheme collapsed: property values plunged, her borrowers defaulted, and she could not pay back her own creditors.

So Zheng quietly shuttered her store, transferred her remaining assets to her daughter and disappeared in late August. She has since been found and is now in police custody.

Some private entrepreneurs who went into hiding to escape repaying billions in high-interest loans have returned to China. Among them was Hu Fulin, CEO of the Zhejiang Center Group

Business Owners Trapped By Debt

On a recent day, the doors at what used to be the Zhengdeli shoe factory in Wenzhou are chained shut. The only person there is a security guard from the government, which has taken over the facility.

In late September, the factory’s owner, Shen Kuizheng, plunged to his death after jumping from his 22-story apartment. He was facing more than $60 million in debt.

Xu Jianpian, another Wenzhou factory owner, knew Shen.

“[Shen] expanded his business and wanted to be No. 1 in the shoemaking industry. He took out underground loans. And the interest was more than $15,000 a day,” Xu says.

Debt crisis hits China’s cradle of private firms

Dubbed the nation’s capital of private financing, the city of Wenzhou offers a textbook example of how non-bank lending has fueled private-sector prosperity — and risk-taking — in China.

Wenzhou’s private entrepreneurs, scrappy survivors in an economy ruled by state industries, once thrived on a formula of cheap backstreet loans and low-cost manufacturing.

Now, they’re at the center of what some have dubbed China’s own subprime debt crisis, a festering mess of borrowings gone sour that has become one of the weakest links in the economy — at a time when strength is most needed to offset weakness in the U.S. and Europe.

Pyramids of high-interest private lending are collapsing as companies whose profits are dwindling due to rising costs and weakening demand default on their debts.

The true scale of informal lending nationwide, much of it derived from bank loans originally intended for other purposes, is unknown. But such lending has ballooned because China’s banks are not allowed to charge higher interest on riskier loans and mainly lend to other large state-controlled enterprises, shunning small- and medium-sized firms. Many small business owners have no choice but to turn to private lenders for financing, despite the punishingly high interest rates. Interest charged by private lenders can be as high as 90%, inviting comparisons with dodgy investment schemes.

Nearly 90 percent of Wenzhou’s residents and almost 60 percent of the companies engage in private lending, the central bank says, although officially the government says only 20 percent of lending in the city is private.

But slowing demand for exports, the lifeblood of Wenzhou companies, along with rising wages and soaring commodity prices have squeezed already tight margins and left many small businesses struggling to repay debts.

“Shadow banking is needed but the problem is there aren’t enough regulations,” said Sun Mingchun, a Daiwa Capital Markets economist, “They need to be regulated by national regulators as local governments mainly focus on boosting their own economic growth without realizing regional lending risks.”

Kangbashi New Central District, a ghost town due to its new buildings but few people, is an extreme example of Ordos’ locals’ craze for property

China’s shadow banking system spills north

But behind Wenzhou’s woes lie a wider problem in China: many with capital to invest are no longer looking to manufacturing, when real estate, speculating in commodities such as Pu Er tea and high interest lending can offer much better returns.

Barely weeks after Premier Wen Jiabao paid a rare visit to the eastern city of Wenzhou amid an epidemic there of debt-fueled business closures, a similar outbreak is undermining the future of Ordos (Chinese: 鄂尔多斯), in China’s Inner Mongolia, a city that has become so rich it has been called “China’s Dubai”.

The wealth of Ordos is built on vast deposits of coal, which account for one-sixth of the nation’s total reserves, and gas, with proven reserves of about 750.4 billion square meters, or one third of the nation’s total reserves.

Given limited investment alternatives on the mainland, rich and not so rich residents have invested in the property market. With sate-owned banks reluctant to lend as the government seeks to curb property speculation and inflation, many have also earned money by making private loans that can earn an average annual interest rate of 30%.

Kangbashi New Central District, a ghost town due to its new buildings but few people, is an extreme example of Ordos’ locals’ craze for property.

The new district was initiated in 2006 to drive up measurable gross domestic product (GDP) growth – a yardstick for evaluation of the performance of local officials.

It has been equipped with wide highways, endless rows of luxury residential units, government buildings, office buildings, shopping malls, sculpture parks and a theater. But after an estimated investment of 17 billion yuan, only 50,000 people have moved in. The local government has vowed to move schools and enterprises into the town, but has not given further details.

The majority of households in Ordos city, just as in Wenzhou in Zhejiang province, are believed to be engaged in private lending.  Private lending may account for 30% to 40% of real estate industry funding and 60% to 70% for the much-fragmented coal mining industry.

“The crisis has come now. If no proper measures are carried out, Ordos is very likely to follow the path of Wenzhou,” said Zhou Dewen, chief of Wenzhou’s association to promote small and medium-sized interprises (SMEs)

温州高利贷危机危机

温州模式是民间金融和中小企业发展状况的风向标，如今，这座城市因为从年初开始出现的温州老板跑路和跳楼事件而吸引了全国的目光。

愈演愈烈的温州民间借贷危机背后，是温州老板一轮的“跑路”热潮。分析资料显示，温州中小企业为应付生产及不断升高的工资与材料成本，被迫转向高利贷，企业主挖东墙补西墙，许多表面风光的企业背后都债台高筑。

温州老板“跑路”，原因并不复杂。企业资金链断裂，内外压力骤增，不得不逃之夭夭。以此番“跑路”领头羊信泰集团为例，信泰乃温州最大眼镜生产厂商，经营 中国市场销量最大的太阳镜品牌。2008年，企业开始进军光伏产业，但其年仅数亿元的产值，根本无法支撑扩张需求。银行信贷管得严，只好在高利贷圈中摸爬 滚打，企业民间借贷已达12亿元，光月息就得支付2000多万元。近来经济形势趋紧，企业因资金链断裂而陷入绝境，老板无奈，一跑了之。

被广泛引述的一个案例是，一位不愿具名的企业主称，自己的工厂有1000多名员工，一年辛苦到头利润不足百万，而太太在上海投资十套房，八年间获利超过3000万。面对此情此景，很多实体经济从业者表示，目前制造业的净利润已经在5%的警戒线以下，只能勉强维持。他们毫不隐晦地指出，很多制造业的老板都参与了民间借贷的生意，将从银行弄来贷款做拆借，实体经济“空心化”已是不争事实。

尽管高增值高回报，一直是温州人追求的终极目标。但在他们逐利成性的背后所隐藏的，是温州企业家族管理制度对现代企业所表现出来的不适应性。由于温州企业大部分为家庭式私企发展而来，不愿意进行垄断、并购，即使是股份制企业很多本质仍然是私营的，至今温州上市的企业仅只有10家，遍地小企业根本无法发展壮大。

而这种以小商品经营为主要特征的传统经营模式，在强大的竞争对手面前显得软弱无力；缺乏诚信、惟利是图，纯粹以赢利为目的的经营理念已与现代社会格格不入。既没有垄断资源又不吸收市场资金以投资进行企业转型，仅依靠资本运作是无法长期发展的，这是“温州模式”的悲剧。

在市场经济先进的土壤之上，温州模式赖以成功的先天优势已经逐渐失去，中国进入了高成本时代，尤其廉价劳动力的时代已经一去不返。没有了低成本，温州制造何以生存和发展？

房产泡沫标本 鄂尔多斯民间借贷危机

在温州老板密集跑路之际,在千里之外,与江浙、山西等地资金有复杂关联的内蒙古鄂尔多斯市,也深陷高利贷泥潭,局部危情显现。9月24日，鄂尔多斯市中富房地产开发责任有限公司法定代表人王福金自缢。这成为鄂尔多斯民间借贷危机爆发的标志性事件。父亲借钱儿子放贷，近九成家庭或个人参与到民间借贷市场里。在资金流向上,温州因拥有众多出口型企业,而显得较为分散;鄂尔多斯则过度集中于房地产和煤炭行业,若资金链大面积断裂,有可能进一步引发行业(以房地产业为主)危机,危及地方经济发展。

尽管公众对鄂尔多斯民间借贷危机的关注程度，远不及温州，但其影响也较严重。如同温州一样，鄂尔多斯也是民间富裕程度较高、民间资本较为集聚、民间借贷 较为活跃的地区。据不完全统计，鄂尔多斯资产过亿元的富豪在6000人以上，资产上千万元的富人则至少有几万人。这些民间资本大量参与民间借贷，鄂尔多斯 民间资本规模超过2000亿元。

康巴什是个原本仅千余人的荒漠村落，如今这个地图上的新地名成为鄂尔多斯市耗资50多亿元打造的新城。据康巴什新区政府网站数据，截至今年6月18日，康 巴什地上项目总建筑面积322万平方米，预计到2011年年底，新区本年新增竣工面积达到350万平方米，总竣工面积672万平方米。房产泡沫标本;鄂尔 多斯”空城”面积将再扩两倍。