Rampant illegal lending 'threatens order'
By JOHN KOHUT in Beijing
INFORMAL lending outside central bank control is rampant, involving billions of yuan, thousands of companies and the potential for major financial disruption, according to a foreign economist based in Beijing.
''Because of the poor regulatory environment and legal environment, you have at the moment a lot of informal financial activities, which has created a lot of concern among the authorities,'' said the economist, who asked not to be identified.
''If they don't check the so-called informal fund raising activities in the country right now, then the banking system, the official financial system, may continue to lose out in terms of being able to mobilise financial savings,'' he said.
Informal lending is now running at about 200 billion yuan (HK$270 billion at official rates), according to government statistics.
Last week the government disclosed details of an alleged billion-yuan fraud in which the Great Wall Machinery and Electronics Company was said to have illegally issued bonds in a disguised form, promising annual interest rates of 24 per cent or more.
The Workers' Daily said yesterday that in the first quarter of this year, loans worth 50 billion yuan had been collected outside the official banking system, and this ''greatly affected the normal bank deposits''.
Most of these funds were used for property profiteering and for purchasing smuggled cars, causing ''disorder in economic operations,'' the newspaper said.
''Some banks, in order to get a high interest rate, want only to lend money to the non-financial system - loans in a disguised form - so the amount of loans has got out of control,'' the newspaper said.
The economist said the Chinese central government was trying to move quickly to draw up regulations, but added that: ''It's one thing to have the law, another thing to implement it well''.
Informal and illegal fund-raising is being carried out by enterprises, local authorities and all sorts of quasi-government institutions which should be regulated by the central bank.
Many companies are now borrowing outside the bank network at rates of 30 per cent and higher.
The economist said there might be thousands of companies, including town enterprises and state-run concerns, borrowing informally in the same way as Great Wall allegedly had.
''Because the legal apparatus is not well developed, people just do whatever they want. Central authority is far away,'' the economist said.
If the central bank runs out of funds, then it may have no choice but to allow some state-run firms it supports with policy-based lending to go bust.
The government is trying to crack down on illegal fund-raising by sending out teams to ensure that local authorities are implementing state policy.
''But it's going to take a little while before we can see whether it's having any effect or not. Perhaps in another three or four months, you might see some slowdown in the economy,'' said the economist.
Among other things, the wild borrowing is inflationary.
The central government could pull with a heavy hand to rein in the economy, but seems to prefer a more cautious approach.
''There are a number of measures that are probably much more effective than they were several years ago, like raising interest rates, but the recent increase in interest rates was so small, it's probably not very effective,'' said the economist, referring to interest rate increases averaging 1.19 percentage points announced a few weeks ago.
''If they really want to crack down as happened in 1988, it probably would work, but I guess they do not want to kill the goose that lays the golden eggs, so they are trying to engineer a soft landing and they still have some time on their side,'' the economist said.
''My feeling is inflation is going to get worse before it gets better.''