Informal loans and the credit crunch

The Chinese have found a way around the credit crunch that is enveloping the developed world. The are reverting to the tried and tested route of informal networks to raise funds.

Chinese Firms Tapping Informal Loan Networks [The Economic Observer Online]

With few other options to save his business, Zhang Wei ultimately had to borrow two million yuan from a Wenzhou shoemaker in order to tie over the difficult times.

Squeezed by the Chinese government's tighter macro economic policy since the latter half of 2007, Zhang found difficulty in securing loans while facing rising costs and other market pressures. More troubling is that Zhang's was not an isolated case.

The All-China Federation of Industry and Commerce said there were Chinese private businesses starving for loans in Chongqing, Zhejiang, Jiangsu and Jiangxi Provinces, and recent research revealed that they were increasingly turning to the cash-strong Wenzhou business communities for a lifeline.

"In Zhejing province, Wenzhou is the bank," said Zhang.

This type of lending is storing up a huge amount of trouble ahead due to the exorbitant interest rates being charged.

Research by the Federation estimated that Chinese companies raised some 800 billion yuan through informal channels last year, among which researcher Chen Yongjie said over 20 billion yuan likely came from Wenzhou.

Businesses that raised money in this fashion would likely be charged a 5% monthly interest rate, amounting to around 60% in one year.

When this bubble bursts and either the lender of the borrower learns the folly of their lending or borrowing there is going to be a hell of a hangover. This is a country learning to come to terms with capitalism and it will be a hard lesson indeed.

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