Banking & Finance

The perils of debt

Controversial case sees entrepreneur facing death for lending money

Death sentence for illegal lending: Wu Ying

Shylock met with financial and personal ruin in Venice when he demanded his pound of flesh to repay a loan. But usury could cost Wu Ying even more, with a court now considering whether to confirm the death sentence she first received two years ago.

Things started out promisingly for Wu. The high-school dropout had built a successful chain of beauty parlours and hotels, and even made it to 68th on the Hurun Rich List with assets estimated at $560 million.

But her fall was just as rapid. In 2007, just 26 years-old, she was arrested for embezzling $59 million from investors in a lending scheme.

Wu has denied misappropriating the funds, and her fresh appeal rests on submitting a guilty plea to the lesser charge of ‘illegal fund-raising’ – which carries a maximum penalty of 15 years in prison.

But the practice of unauthorised money-lending is so widespread that the real shock to many is that Wu should be facing such serious censure.

“If Wu Ying is sentenced to death, how should we deal with all those other people who are illegally accepting deposits and lending out at high rates?” asks a Southern Metropolis Daily editorial. “With at least one trillion yuan of private financing in China, how many bank employees, guarantors and even public servants would be forced to go to prison?”

“The case has unleashed a debate about illegal fundraising and private financing,” explains columnist Wang Shichuan in the China Youth Daily, “the existence of the unofficial financial market is a tragic result of the systemic problems that plague the country’s financial system.”

WiC has written before about high-interest lending. It’s an illegal and (obviously) unregulated form of finance, but one that authorities have long tolerated. China’s major banks are known to prefer to lend to large companies or those that are state-owned. Privately-owned enterprises can miss out. The proportion of bank funds lent to SMEs has been estimated at just 10%.

“SMEs are usually just given working capital loans repayable within one year,” writes financial commentator Ye Tan in the Southern Metropolis Daily. In fact, many use the loans for longer term fixed asset investment. The trouble is, Ye says, that when the bank credit is withdrawn, desperate entrepreneurs find they are forced to turn to the underground money market. And that ain’t cheap.

The recent push to curb bank loans in order to fight inflation has made matters worse for private borrowers. “Recently, private lending rates have been very high,” Zhou Dewen, head of the Wenzhou SME Business Development and Promotion Association told the Economy & Nation Weekly magazine, “for short-term loans, monthly rates have reached 6-8% [that’s an annual rate of 72-96%].”

With rates that punitive, money lending is a popular sideline for cash-rich entrepreneurs (as it was for the now disgraced Wu Ying).

“Many business people set up their own investment companies to take in funds,” a Ningbo businessman told E&N, “but what they are doing has nothing to do with the registered purpose of their business.”

“Gross profit for doing [ordinary] business is only 10% on average,” one local businessman told E&N magazine, “why not lend the money out for a 60% or even 100% return?” China’s benchmark deposit rate is currently 3.25%.

Underground lending doesn’t always keep the lowest profile. “In cities like Wenzhou and Ningbo adverts for ‘short term liquidity’ abound,” explains E&N, “many credit guarantee companies, investment companies and investment consultancies are actually high-interest moneylenders.”

It estimates there are 300 credit guarantee companies with thousands of other unofficial lenders in Wenzhou alone.

The ‘deposits’ are often raised from close friends and family, both foreign and domestic. “These days raising funds from overseas isn’t difficult or expensive,” one Hangzhou native explained, “money can come in through false trading.”

Along with high returns come high risks. “It’s like gambling,” says Lin Jun, vice president of Ningbo Credit Guarantee Association, “if a borrower’s project succeeds then he can clear the cost of usurious interest.” Failure, on the other hand, often means the borrower has to abscond. Depositors have little recourse.

Regulators will be worried about reports that the ‘official’ banking system can also overlap with the informal sector. It works like this: credit guarantee firms co-sign bank loans at normal rates with businesses that can access financing. They then lend the funds out again at a higher rate.

“Without connections to bank insiders, loans are rarely approved,” contends E&N. But the risk of default remains much higher in this grey-area lending – and in the end that could lead to write-downs for the ‘official’ banks that have made the initial loans.

Despite the dangers, some commentators are even sympathetic to high-interest moneylenders like Wu Ying. “If Wu is spared the death penalty or released with a misdemeanour charge it could signal the dawn of a new system,” Fang Quan, editor of Chinese Venture magazine, writes on his weibo. “She is a victim of our underdeveloped financial system.”


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