China May Inject Cash to Prevent Wenzhou Crisis, ING Says
The People’s Bank of China “can just put bundles of cash into trucks and drive it to Wenzhou” or selectively cut local lenders’ reserve requirements, Tim Condon, Singapore-based head of Asian research at ING and a former economist at the World Bank, said in an interview.
Wenzhou, home to some of China’s biggest producers of shoes, clothing, cigarette lighters and leather goods, is seen as a barometer of the health of the nation’s private enterprises. Private-lending disputes in the city surged 71 percent to 5 billion yuan ($783 million) in the first eight months of this year as small-business bankruptcies spread and some owners fled, according to a statement on the government’s website today.
The nation’s informal lending market, which may have expanded to almost 4 trillion yuan, is the most likely short- term “time bomb” facing the Chinese economy and can be more abrupt and damaging than the debt burdens at local authorities, according to Credit Suisse Group AG.
“It is unclear whether this ‘time bomb’ will go off, but we believe something is likely to happen over the next 12 months,” Tao Dong, chief economist for non-Japan Asia at Credit Suisse, said in a report this week. “Either Beijing takes proactive and decisive measures to deal with the issue beforehand, or a mini-credit crisis could occur.”
China has raised interest rates three times this year and ordered lenders to set aside a bigger portion of their deposits to curb inflation running near a three-year high. Monetary tightening and smaller loan quotas have led to a 50 percent surge in informal lending this year as small businesses and developers turned to state-owned companies, private entrepreneurs and individuals for loans at interest rates of 6 percent to 8 percent, according to Credit Suisse.
The private lending market in Wenzhou is in a “relatively active” period and outstanding advances totaled about 110 billion yuan, equivalent to about 20 percent of the city’s bank loans, the Wenzhou Daily reported on July 22, citing a report by the central bank’s local branch. Interest rates averaged 24.4 percent in June, compared with a range between 13 percent and 17 percent in the past eight years, according to the report.
At least 80 private business owners in Wenzhou fled this year, the official People’s Daily reported today on its website, without saying where it got the information. Three entrepreneurs have jumped from buildings since Sept. 22 after being unable to repay debts, leading to two deaths and one injury, the report said.
Local bank branches should obtain more loan quotas from their headquarters to ensure new lending this year meets the 100 billion yuan target, and lenders can’t charge more than 30 percent above the central bank’s benchmark rates, Wenzhou’s government said in a statement dated Sept. 28.
--Zhang Dingmin. Editors: Linus Chua, James Gunsalus
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