Wenzhou sails through lending clamp

Borrowing rates in entrepreneurial city remain stable, supporting official line on ample liquidity

PUBLISHED : Thursday, 27 June, 2013, 12:00am
UPDATED : Thursday, 27 June, 2013, 4:26am

Mainland efforts to rein in shadow banking, which contributed to the worst credit crunch in at least a decade, have not driven up costs for borrowers in at least one place: Wenzhou.

On June 20, as banks demanded a record 30 per cent to lend to each other for one day, small businesses in the export hub paid 23.42 per cent for one-month loans from pawn shops, small lending companies and individuals, according to data from a local government-backed agency. That's almost unchanged from this month's average of 23.17 per cent.

Stable borrowing costs in the coastal city that is a bellwether for informal lending may support policymakers' argument that the economy has enough financing. Premier Li Keqiang has urged banks to make better use of existing credit and the People's Bank of China has injected cash into particular lenders, rather than easing total funding, even after money-market rates jumped to a record and stocks entered a bear market.

"If you look at the growth rate of money supply or total social financing, it's quite obvious that the economy isn't short of liquidity," said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities. "It's just not where it should be."

Regulators are seeking to halt mainland banks' increased use of interbank borrowing and short-term deposits to finance long-term loans and investment in trusts. The crackdown might damage the economy by shrinking the non-bank funding that smaller companies relied on, Barclays said last month.

"The PBOC has basically declared war on the shadow banking industry," Michael Shaoul, chairman of Marketfield Asset Management, told Bloomberg TV. "I expect the PBOC to win that war, and unfortunately that's going to come at great cost to the domestic Chinese economy."

Last year, Wenzhou, a city of nine million residents and 400,000 small businesses, was picked for a pilot programme to curb informal lending after more than 80 businessmen committed suicide or declared bankruptcy over six months. The Wenzhou Private Lending Registration Centre, the first in the country to monitor underground loans, matches borrowers with lenders and tracks data from 350 sources.

Total liquidity in the banking system was "reasonable", the central bank said in a statement released on Monday.

Money-market rates are fluctuating because of rapid loan growth, the demand for cash during a public holiday this month, companies making tax payments and banks meeting mandatory reserve requirements, the PBOC said.

The mainland's aggregate financing, which tallies bank loans, corporate bonds, equity raising and other off-balance-sheet credit, surged 50 per cent in the first five months to a record 9.1 trillion yuan (HK$11.3 trillion), the central bank said this month. About a third of that went to entrusted loans, trust lending and bills, which together with underground lending are known as shadow banking.