It was a case of premature celebration for Hong Kong factory owner Danny Lau Tat-pong when his application for a 5 million yuan (HK$6 million) loan to a bank in Dongguan was swiftly approved two months ago. However, Lau - whose factory in Dongguan produces metal curtain walls for skyscrapers, such as the city's new government complex at Tamar - soon realised the approval was only the beginning of an endless wait for actual access to the loan. To his surprise, Lau found himself among an army of similarly qualified borrowers waiting in line for loans as banks in the industrial hub are restricted by a monthly lending quota. 'If a company is in urgent need of funding and gets caught in this situation, how will it survive?' Lau said. 'That's why corporate loan sharks are mushrooming.' He finally obtained a loan with lower interest in Hong Kong. Lau, who is also the chairman of the 1,000-member Hong Kong Small & Medium Enterprises General Association, said smaller firms had become victims of Beijing's tight monetary regime. The central government has restricted lending and turned off the credit tap for property developers, in particular, to rein in real estate prices and inflation. But a side-effect of the policy has been the adverse impact on the liquidity of smaller firms. Higher lending rates and limited availability of credit across the border have prompted mainland firms to take more loans in Hong Kong this quarter than at any time in the past 12 months, according to the Hong Kong Monetary Authority. Hong Kong-dollar-denominated loans to companies in the city totalled US$1.31 billion between July and September, the highest year-on-year quantum. Loans and advances climbed 1.4 per cent in July, with loans for use outside the city rising 4.3 per cent, compared with a 0.7 per cent increase for local credit. Borrowers, on average, pay 72 per cent less interest in Hong Kong, compared with the mainland. In his case, Lau said the bank in Dongguan offered an interest rate of 7 per cent per annum for a 3 to 5 million yuan loan, plus 5 per cent per annum as insurance cover, totalling 12 per cent per annum. Lau finally secured a similar loan amount in Hong Kong at 6.5 per cent per annum. 'Some corporate loan sharks on the mainland offer a rate of 15 to 50 per cent,' Lau said. 'How can smaller firms afford this?' A Morgan Stanley research report said the mainland's credit crunch would persist in the coming months as a way of avoiding asset bubbles, amid mounting global economic uncertainties. Lau said the credit crunch aggravated the problems of manufacturers, which were already reeling from rising wages and production costs, the yuan appreciation and industrial upgrades in Guangdong. The yuan gained 0.02 per cent and closed at 6.3992 per US dollar yesterday in Shanghai, according to the China Foreign Exchange Trade System.