Banking & Finance

Pawn cocktail

Gloom is boom for China’s underground banking system

He just couldn't keep up on the debt payments

When your bank account is as bare as a Soviet bakery under Brehznev, and you need ready cash, many Chinese are finding there might be only one place to go.

Pawnbroking has a 3,000 year history in China, and along with prostitution is probably among the country’s oldest professions. But while dubious massage establishments have seen handsome growth over the past decade, the pawnbrokers looked to be in terminal decline – thanks in large part to the rapid expansion of consumer lending among the big banks. But when lending standards were dramatically tightened – at the government’s behest – in the middle of 2008, many banks began to refuse to lend to any but the biggest firms, or to state-owned entities. For those desperate for cash, the pawnbrokers were the last resort.

According to the South Weekend Reporter, business is booming for pawnshops across the country. Yang Yong, the president of the Beijing Pawn Association and the owner of Huaxia Pawnshop, says he’s never been busier – the amount of automobile-backed loans surged by 40% in 2008; loans against property, the largest share of the business, also rose 30%. The workload is so high that Yang has had to hire more staff.

Most of Yang’s clients are owners of small- or medium-sized enterprises. In one instance, the head of a construction company used his Rmb6 million ($870, 000) villa as collateral for a loan to pay for his firm’s ongoing costs and wages. With property prices freefalling, Yang admits that he’s taking a huge risk should the borrower default, which has become increasingly common as of late.

When the borrower defaults, the pawnbroker takes title of the collateral and sells it to recoup the losses. As the economy stumbles, the number of “dead pawn”, that is, unredeemed collateral, has gone up. As a result, pawnbrokers have imposed much stricter control on the approval of new loans. Wall Street would call it a refocusing on risk management.

Private lenders (or loan sharks), on the other hand, are undeterred by the growing number of loan defaults. These days, the going interest rate on a subprime loan is around 15% monthly, and 30% on quarterly repayments. According to Mr Zhang (not his real name), a private lender in Chuzhou, many people who have fallen behind on payments have deliberately gone missing. But given the exhorbitant interest rates they charge, most private lenders can afford a few lapsed payments.

For those who are less forgiving, debt collection agencies are for hire, especially as the process of chasing down late payment can be laborious and potentially unpleasant.

As the level of loan defaults surges across the country, professional debt collectors, or “financial counselling services,” as they like to be referred to in China, have seen their business increase substantially. According to Black Cat Debt Collection, business is terrific. Black Cat charges 25-40% of the subject amount, and promises to collect the debt within 15 to 90 days.

Despite the fees, the services of the collectors are often preferred to the more formal channels for pursuing debtors. The person in charge at Black Cat told the South Weekend Reporter: “People have come to us because lawyers are slow… more importantly, they are not very effective.”


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