China Focus: Loan shark stabbing case highlights weak link in financial system

The case of a son that stabbed and killed a violent debt collector in defense of his mother has stirred heated debate in China. Legal issues aside, the incident laid bare the financing difficulties for the country's myriad small businesses and the ugly side of the private lending market.

In April last year, more than 10 people went to Su Yinxia's company in Guanxian County in east China's Shandong Province demanding payment for loan sharks allegedly by means of insulting Su and her son Yu Huan.

In disputes Yu stabbed to death one of the debt collectors.

Public sympathy for Yu, who was given life sentence for the killing, erupted following a detailed coverage by Southern Weekly, with most questioning the severity of the sentence.

In a statement issued March 26, the Supreme People's Procuratorate pledged to review the case to determine whether Yu was acting in self-defence and investigate possible dereliction of duty by the police officers concerned..

Apart from legal and moral controversies, the case also highlighted that credit demands from small and medium-sized enterprises (SMEs) are not being adequately met through formal channels, forcing them to turn to private lenders such as loan sharks or peer-to-peer platforms.

Su borrowed more than 1 million yuan (145,138 U.S. dollars) from a real estate developer with a monthly interest rate of 10 percent, way above costs of regular bank lending.

In China, banks are often more inclined to lend to state-backed firms rather than smaller players, which are associated with bigger credit risks, while not without justification.

China's SMEs have played a leading role in creating jobs but face daunting challenges as most are involved in low-profit traditional sectors.

Small firms are baring the brunt of the side effects associated with China's economy shifting gears toward a more balanced model, especially against a backdrop of insufficient market demand worldwide and rising market pressure.

Moreover, Chinese banks are increasingly more cautious due to rising bad loan ratios, leaving SMEs little chance of getting credit from such outfits.

According to a report by the China Banking Association and PwC, about 90 percent of 1,794 bankers surveyed said risk management from bad loan pressure was the biggest challenge in 2016.

In the absence of the support from official organs, private lending has since prospered.

While the black market has, to some extent, helped satisfy the financing needs of SMEs, the industry's relentless growth and lack of regulation have left lenders and borrowers both unprotected, and there are frequent reports of defaults and malicious debt collections such as that in Shandong.

According to Yang Tao, assistant director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, there needs to be more targeted financial institutions and products, as well as improved regulatory rules to cater to the SMEs' credit demands.

To better serve SMEs, Yao stressed the importance of innovation and big data, which could help reduce loan costs and enable lenders to offer differentiated credit services to businesses.

SMEs, on their part, should improve their competitiveness and credit score.

The government needs to improve the related laws and regulations, and promote a credit-based culture to create fairer funding mechanisms for all market entities, he said, stressing the role of the market in the process.

The government is already exploring solutions beyond traditional banking. In January, China's State Council specified a string of measures aimed at better regulating regional equity markets to aid financing for SMEs.

Regional equity platforms are an important part of China's capital market that mainly provides financing services for non-public stock companies in equity circulation. Endi