Wang added that it’s important to improve the financial market environment with restrictions while ensuring that small and medium-sized enterprises (SMEs) have access to loans to support growth.
His remark caused anxiety for many Wenzhou merchants who have been funding their speculative exploits, mainly in the property markets in a number of mainland cities and Hong Kong, with loans from the city’s underground banks.
A survey by the Wenzhou branch of the PBOC on the best investment method in the second quarter saw property investment knocked off the top spot for the first time since 2009, witnessing a decline of 5.2 percentage points compared to the same period last year.
Even those at the top of the property food chain are feeling the pinch. Tightened bank credit has forced many developers to borrow from the underground lenders to cover their short-term funding needs.
“Most of us property developers have to borrow short-term money with high interest rates from underwriting companies or private money lenders for about a week every three months if we have a new project to launch,” said one property developer, who asked not to be named.
He added that there was a risk that he might not have enough money to pay back his high-interest loans if the number of buyers continued to decline.
Many SMEs, which have been starved of loans as the country tightens credit in its fight against rising inflation, are driving an underground banking boom by turning to unofficial funding sources to survive.
About 80 percent of the SMEs in Zhejiang are using underground banking loans to fund their businesses, even though black market interest rates in the province have surged to as much as 10 percent per month, according to statistics provided by the provincial government.
“Only about 10 percent of SMEs are able to obtain loans from banks or authorized underwriting companies, with 90 percent left to solve their financing problems through underground banking,” said Cao Hua, a local underground banking operator, who is in charge of money gathering and lending to companies.
Beijing tightened monetary policies this year to combat inflation that has risen relentlessly after the country launched its $586 billion stimulus program in late 2008 following the eruption of the global financial crisis. An influx of capital from international investors as a result of looser monetary policies in some developed economies has also contributed to the problem.
“Usually those State-owned enterprises are able to obtain bank loans at an interest rate of about 7.2 percent, compared with the one-year benchmark interest rate of 6.56 percent, but SMEs can only borrow money at higher rates from third-party companies or private lenders like us,” said Cao.
She added that the majority of her clients are local SMEs that need to take short-term loans from time to time to maintain their ongoing production.
With the tightened lending policies, the amount of overall yuan lending increased by 16.4 percent year-on-year in August, 0.2 of a percentage point lower than the previous month and 2.2 percentage points lower than in August last year, according to the central bank.
“Small and medium-size firms, which are already burdened with the rapid rise in labor costs and the soaring price of raw materials, are facing financing problems as well,” said Zhou Dewen, chairman of the Wenzhou SMEs Development Association.
Zhou added that the increases in the official interest rate and reserve-requirement ratio have increased the cost of financing among SMEs by about 40 to 50 percent compared with last year.
Private underground lenders are particularly active in Wenzhou, a city that has boomed during the past three decades by producing a wide range of consumer goods. This activity in the city, along with other manufacturing hubs in the east and southeast of the country, has helped China become the workshop of the world.
The accumulation of wealth as a result of manufacturing has also led to ample liquidity in the local market. The black market in Wenzhou is threatening to replace local banks as the major source of funding to finance the town’s undiminished building boom. Staying out of sight, the key market players are the many underground lenders, operating in a gray legal area to take deposits and make loans at interest rates that can go as high as 200 percent a year.
