By any measure it is a grim way to go, burned to a crisp in the front seat of your own Audi.
That was the unfortunate fate of Jin Libin, a (former) billionaire from Inner Mongolia, who killed himself by setting his car alight in April, leaving at least Rmb1.2 billion ($190 million) of debt owed to private lenders behind him.
Jin’s demise was soon creating a stir, as rumours circulated that he had faked his own death by substituting the body of his long-dead father. Not so, said officials at the local Public Security Bureau, who confirmed that the dead body was Jin’s, following DNA testing.
And then the financial reckoning as all the banks, pawnshops, guaranty companies and individuals that had lent Jin money began to come forward at police request.
Similar police investigations into disappearing businessmen have also made headlines in Wenzhou recently (although in this case, they appear to have skipped town rather than taken their own lives). The story is otherwise a similar one; of company bosses borrowing from private lenders at usurious rates, and then unable to make repayments (see page 6).
Three years on from its Western incarnation, China’s small and medium-sized enterprises are now experiencing a credit crunch of their own.
Jin started out selling fruit on a market stall in Baotou, a city in Inner Mongolia, according to Global People magazine. He went on to become a successful wholesaler of well-known brands like Yili milk and Tsingtao beer.
But in 2004 he began to expand aggressively into mining, agriculture and hotel projects. He also started borrowing heavily to fund his new investments, tapping the commercial banks and rural credit cooperatives, then the pawnshops and a swathe of individual lenders.
The majority of the debt seems to have been run-up privately, away from the state-owned banks.
“From the city’s leadership to the vegetable vendors, they have all lent money to Jin Libin,” a Baotou insider told Global People. Business seemed to be going well, reports the Global Times, with Jin’s net worth rumoured to be Rmb4 billion. But behind the scenes he was struggling, forced to find up to Rmb5 million a day in interest payments.
WiC has written periodically about the difficulties that businesses smaller than Jin’s have faced in securing bank credit (see issues 32, 63 and 104). And the financial pressure has tightened this year, as the People’s Bank of China steps up its fight against inflation, including another increase in the reserve ratio required for banks hitting a record high of 21% last week. Experts say this will freeze another Rmb370 billion within the system, and push cash-starved firms further into the arms of private lenders, often for bridging loans to meet short-term financing needs.
How big is the private lending business? Earlier this year, Zhang Jianhua, director of research at the People’s Bank of China, estimated that private loans had reached Rmb2.4 trillion by the end of March last year, accounting for 5.6% of China’s total lending. His estimate will likely be understated, as much of the lending is beyond official view.
For the lenders themselves (assuming that their loans are fully repaid) it can be a lucrative business. In Guangdong province, average interest rates in the informal sector are about 30% a year, according to surveys from the regulatory authorities, compared to around 9% for borrowing through official bank channels.
But unsecured borrowers face having to pay much more, with some monthly interest rates reaching a backbreaking 15%, says Nanfang Daily.
“Even drug trafficking can’t offer such high returns,” a private lender boasted to the newspaper.
© ChinTell Ltd. All rights reserved.
Exclusively sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.