Wenzhou's grey loan market in downturn

PUBLISHED : Monday, 14 May, 2012, 12:00am
UPDATED : Monday, 14 May, 2012, 12:00am


Private lending in Wenzhou, Zhejiang, a seedbed for private businesses over the past three decades has plunged since a credit crisis almost crippled the local economy, city data shows.

An official with the city's banking regulator told Xinhua yesterday that a recent survey found that private lending had fallen 30 per cent since August. The report, which did not provide the figures in yuan, also said loans from individuals fell as much as 50 per cent.

'Private creditors dare not lend out money and would rather deposit it in the bank after a large number of businessmen violated agreements or just ran away last year, as they couldn't pay their debts,' said Xiang Songzuo, chief economist for the Agricultural Bank of China.

The Wenzhou survey also showed local courts have accepted more than 22,000 cases concerning private lending disputes since August, an average of nearly 100 a day. More than 800 financial intermediaries, which were thriving until recently, had closed by late March, the official said.

During last year's credit crunch, about 100 private company bosses in Wenzhou are believed to have disappeared, committed suicide or declared bankruptcy, invalidating debts worth about 10 billion yuan (HK$12.3 billion), Xinhua said.

'Private lending in Wenzhou is shrinking rapidly,' said Xiang, who recently visited the city for a seminar on the industry. He said that in addition to concerns about the risks, the demand for private lending from local businesses was also decreasing amid a downturn in factory orders.

In March, the State Council announced plans to formalise Wenzhou's 'grey' lending industry and make the city a proving ground for potential financial reforms.

Xiang said companies usually borrow from private lenders when their businesses are starting out and banks are unwilling to lend to them or when they are in urgent needs of working capital.

'Private lending is so flexible that they may get the money within a day,' he said.

Xiang said it was hard to say what portion of Wenzhou's economy was privately financed, but he estimated it was 20 per cent to 30 per cent.

'The mainstream is still banks,' he said.

Banks' non-performing loans in Wenzhou reached 13 billion yuan in March, a jump of 3.6 billion yuan from January, the banking regulator said. Wenzhou's non-performing loan ratio hit 1.99 per cent in March after rising nine months in a row.

Over the weekend, the central bank reduced the amount of cash mainland banks must set aside as reserves after its measures to slow down the overheated economy proved to be too effective.

It was the third time in six months the People's Bank of China had lowered the reserve ratio by half a percentage point. The move should inject about 400 billion yuan of liquidity into the banking system, HSBC said in a research note.

4tr yuan

The value of the mainland's informal lending industry, in yuan, as of September, according to Credit Suisse