Have you been to a bank in the west lately? It's pretty much the same thing with credit being squeezed for small/medium companies.
I work for a financial institution In US, I know.
The reason that banks are reluctant to lend is because it is risky to do so, with the economic climate the way it is.
I partially agree with you on this point. But remember before 2008, lending and investments in America were still high even with loans with terrible qualities. This is because risks are transferable now day, with specially designed credit instruments, loans can get off the books of banks in matter of weeks (sold or swapped with another institution of pension fund).
I can't say the same about Europe, but lending for small businesses in America are mainly the business of smaller community banks. These banks are in trouble now or not lending is due to more restrictions placed on by FDIC (restrictions on lending structures, instruments, and amounts) and the falling of their stock prices on the market due to fear. And the main revenue for small banks are coming from real-estate anyway, and that is not doing well at all.
Even their balance sheet, assets return and overall small business loan quality are sound. Simply because their stock price decreases can cause decreasing capital to be lend out.
So risk is not the main reason why US banks are not lending. In fact many private equity firms here in US (especially in the mid-west) saw this opportunity and use their capitals to bring those banks from public back to private. inject capitals into those banks, after economic climate improve, take them public again or sale them to a another bigger bank for 2X-4X its initial book value.
Fact of the matter is that underground lending is usually between family and friends in China, and these people would know the reliability of the people they are lending money to infinitely better than any credit rating agency could ever dream to.
What more, because of the family connection, the debt is often not just wiped clear if a business fails. If and when that relative who's first business failed starts making money with his second, he will more often then not pay his family creditors back. So the total loss is often exaggerated, precisely because these are not on normal commercial lending terms.
Maybe be true couple years ago, but family and friends can't lend you 2 million yuan right away, If they do, what you do when you need 2 million more in a month?
And that is the amount of cash you need now day to do anything seriously, like opening a restaurants, a small factory, construction company, car wash, internet company... whatever.
And China's small businesses' account receivable turn over ratio are generally very low. if you are a small business, you have to wait for a while before you get paid for your goods and services, by that time; how much cash you have left to operate your business then become really questionable. So massive cash borrowings are needed on a weekly to monthly basis.
Small business not getting enough credit is not ideal and will slow economic growth, but what it will not do is lead to a debt crisis. What will lead to a debt crisis is if the Chinese state banks started lending too much to small and medium businesses as then they expose themselves to bad debts and non-performing loans.
It will not lead to a debt crisis? Most lending to small business in China are now take over by non-bank institutions (They sometime call themselves "agriculture trading Limited or XYZ City Construction to mask their true business, High yield lending). Chinese government have to now limit the amount of lending done by those institution to not lend over rate X4 of the state lending rate of 6.56%.
Private non-bank institutions can only lend at an interest rate that doesn’t exceed four times the country’s benchmark lending rate, according to the statement dated Sept. 28. Wenzhou is located about 470 kilometers (292 miles) south of Shanghai.
The city government also asked banking institutions to increase financing support to small and medium-sized businesses by setting a ceiling on interest rates for loans to those companies. Interest shouldn’t exceed 130 percent of China’s benchmark rate, the statement said. The country’s one-year lending rate is currently at 6.56 percent.
“Given the large proportion of private lending in Wenzhou, we note that defaults on private borrowing could trigger a negative chain effect throughout the lending system,” May Yan, an analyst at Barclays Capital in Hong Kong
Not only in Wenzhou, but also in Yunnan province where I visited is setting up the same no X4 rule, but people are getting around it already.
Rates for private lending can be high as 25%+, some time through uses of multiple IDs and false business entities. Businesses can borrow up to 4-5 million yuan at a time with real interest of 70%+ from private sources!
And most of the time private lender demand HEAVY collaterals before any sort of fund transfer... some people put their home, cars, even their parent's home as collaterals. When they default, lender profit any way from the auction of their homes. The risk of lender are significantly decreased, leading to not caring what business they are lending to, just if they can post up multi-million yuan collaterals, This is dangerous, and its implications are huge.
I would rather small business gets loans from a safe source with 6.5% interest such as the China Construction bank, with a detailed credit checks and review of business plan.
This just can be as dangerous as the Collateralized Mortgage Obligation in the 2008. And like when Wells Fargo giving no-doc, high interest loans to home buyers that can't buy a house in the first place.
What you are seeing is a classic case of an idiot journalist a) not knowing what the hell he is talking about, b) getting quotes from dubious sources, and c) lacking the basic common sense to do some simple reading before cobbling together a frankly ridiculous non-story.
How the BBC managed to employ such an idiot when there are so many people out looking for a job is a far more interesting question than the subject of that story.
Like I said, please ignore most of it, I only read BBC because it don't have a comment section that is filled with bigotry and hatred toward another human being.
But when I see something that is truly become a problem, I think it deserve attention.
