Nod of Approval for Black Lending

When it comes to underground or black market lending, a major source of financing for small and medium-sized business owners, the Chinese Government had taken much the same approach as a legendary hero combating a mythological hydra: decapitating the many heads in an effort to slay the beast. Even now, as the government steps up efforts to tighten credit, the heads of the underground lending realm are sprouting up as fast as they are being cut off, causing China's leaders to rethink their strategy.

Remarks recently made by a central bank official have been regarded as the government's official recognition of unofficial private lending, according to Xinhua News Agency.

"Private lending is a beneficial and necessary complement to formal financing channels," the official said.

These alternative, and illegal, channels meet certain financial needs of various social institutions, especially small and medium-sized enterprises (SMEs) and agriculture-related sectors, said the central bank official. Private lending is also conducive to forming a multi-tiered credit market.

With the rapid development of small-loan companies, the government should regard them as professional lenders, and they should be covered under the government's monitoring system. In the meantime, the official urged a crackdown on crimes like illegal fund raising, loan shark practices and money laundering.

The interest rate of any private loans should not exceed four times that of bank loans, said the official, citing an existing rule set by the Supreme People's Court. He said any rate exceeding this amount is exorbitant and is not protected by law. The disputes stemming from the interest rate should be brought to the court which will determine the effectiveness of the loan contract between the two parties involved.

"Relative departments are studying, trying out and improving a tracking and monitoring system on private lending to provide more comprehensive information for economic decision making and macro-economic control," said the official.

The remarks came amid a credit crunch in the eastern city of Wenzhou, an economic hub for Chinese SMEs, which has caused a number of industrial bosses and business owners to leave the city and even the country in some extreme cases.

The central bank has raised benchmark interest rates three times this year and hiked the reserve requirement ratio for lenders six times, making it difficult for small businesses to borrow from banks.

Many small businesses in Wenzhou turned to high-interest black lending market since they couldn't get bank loans after the government tightened lending to clamp down on inflation. However, due to the bleak international and domestic market conditions, entrepreneurs later found they could not repay the loans. According to a 21st Century Business Herald report, by the end of October this year, a total of 228 entrepreneurs had run away and nine committed suicide. The number is on the rise.

Analysts believed the central bank official's remarks are meant to track those loans and standardize them so the interests of both sides can be properly protected.

Fang Peilin (left), Chairman of Wenzhou Fangxing Guarantee Co. Ltd., discusses his company's financing business with his colleagues