November 7, 2011: Loan sharks have been a problem in the Western World for centuries. From traditional Vegas sharks to payday lenders, the poor have been subject to atrocities by creditors for years, despite government intervention. The situation today is no better for China's small entrepreneurs. Many businessmen have been forced into bankruptcy recently as local credit has been tightening. Not able to withstand public humiliation, some choose suicide, while others find themselves under the burden of creditors and "tattooed thugs."
According to a recent Businessweek article, Zhong Mong, a Chinese pharmacy owner, offered his fingers to a group of private lenders because if they repossessed one of his stores, it would be impossible to pay back another 130 small local creditors, many of whom are local friends and neighbors. Zhong had borrowed 30 million yuan or $4.7 million at rates as high as 7% per month to expand his franchise!
Similar to the U.S., small and medium sized businesses account for 80% of jobs in greater China, but these businesses always find it difficult to obtain local bank financing. Other forms of financing are often much more expensive, leading to complications and often default. Since April, at least 90 CEOs have fled Zhong's city of Wenzhou for the same reason. The 400,000 businesses in the city are facing higher costs because of inflation and soaring black market interest rates because of the sudden credit squeeze. Imagine how fast a business must grow to pay Zhong's 7% monthly interest...
Black market interest rates have doubled this year, growing faster than local profits. Informal lending has given rise to real estate developers driving prices ever higher, leading to more inflation. Similar problems have also surfaced in the industrial province of Guangdong, to the South.
Wenzhou is home to 9 million Chinese and produces 90% of China's eyeglasses and lighters. Many residents of Wenzhou take out bank loans at 1% per month and lend out money at 2%+ per month, pocketing the difference. China's official lending rate is only 6.56%, compared to rates between 20-40% that small businesses are charged here.
Local suicides have prompted Premier Wen to visit the city and pledge to raise bonds to help finance smaller businesses, even if NPLs are higher. Unfortunately for Zhong, it may be too late. He will probably lose his business and will be hired as a paid manager. He and his wife will probably have nothing left.
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