Billz

The Informal China Banking Sector is Growing

For typical private business loan (underground lending as the author calls it), the interest is quoted by the month and need to be paid each month. So the interest does not compound and the total annual interest payments equals monthly payment x 12.

Many Chinese private companies are having cash flow problem. One such example is Wan Song Real Estate company in ZheJiang province. Their total debt is over 5 Billion RMB and total equity is less than 100 million RMB. The company has over 3000 lenders, mostly local residents who try to get high income on savings. Initially the company offered interest rate of 2% per month, when the going got tough, the company tried to raise fund by offering monthly interest rate of 5% or 6%. In March, when the company failed to pay the monthly interest, lenders demanded principal back but there is no money to return. Unless the real estate market pick up significantly in the near term, the lenders will probably lose most of their money loaned to the company.

I think this event will have chain effect of reduce liquidity in the undergound lending system, thereby drive up interest rates, increase the cost of doing business and drive more business into failure. China had good economic time for 30 years, it can not last for ever.