Daily Archives: September 22, 2011

China’s secondary loans market

Written by Paul Adkins

Most China watchers know that over the last several months, China’s Central Bank has tightened the Reserve Requirement Ratio (RRR) several times, in an attempt to reduce the amount of money available for loans.   As well, China’s banks have shown a preference to loan to State Owned Enterprises (SOEs), making it more difficult for Small to Medium Enterprises (SMEs) to fund their businesses.

What most analysts seem to be missing is, where exactly do those SMEs go to in order to obtain working capital or to expand their businesses?

In the last several months, as the credit squeeze tightened, a new secondary loans market has emerged.   Perhaps it was always there, but the size and scale are now huge.

We are hearing report of loans being made, or at least offered, with interest rates running to as high as 6, 7 and 8%…. per month!

These are rates that racketeers, mobsters and other sleazy characters would offer in back streets in Chicago or New York.   We all know too well that taking a loan with rates like that is a sure way to misery and loss, but it seems to be accelerating here in China.

So, who are these racketeers who are fleecing the SMEs?   The same banks who won’t lend to them.   These banks send small customers to little known subsidiaries, off-shoots and shopfronts, where, the SMEs are told, they will be able to get a loan.

It’s hugely offensive, but also likely to accelerate any reform process.   These banks are hastening the end of many small businesses, putting employees on the streets, and making the government wake up to the fact that something needs to be done for that sector of the economy.

The first reports are now coming through that banks are being told to loosen their loan policies, and make more loans available for private enterprise.   To date, it’s on an unofficial level, and advisory from the Central Bank, but given the huge profits from the secondary market (along with increased bad debts), it probably won’t take long before the Central Bank is forced to make adjustments to its official policy.   Time will tell.