Private lending market highlights China's household finance dilemma (2)

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Private lending market highlights China's household finance dilemma (2)

By Xinhua writers Cheng Lu, Wang Wen and Jiang Chenrong (Xinhua) 19:55, September 02, 2013

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PRIVATE LENDING BOOMS

According to local residents, nearly half of the population in Shenmu and 70 percent of rural residents give money to private lending in an effort to get a better return than the low deposit rates offered by Chinese banks.

The pawnshops took deposits from locals on the promise of high returns, and then lent the money at higher rates to others. "The interest rate for private lending is around 36 percent to 60 percent on a yearly basis," a coal businessman surnamed Yang said.

Before 2012, many loan sharks lived in hotels in the long term. "The husband solicited business and the wife collected money. Someone even carried a leather bag to conduct the underground loan business," a local government official said. But now some of them have run away.

If someone carries a leather bag, they are usually engaged in speculation, like a broker.

No data is available to explain the scale of this private lending in Shenmu, but this official speculated it could reach nearly 70 billion yuan.

"Sixty percent of lending goes to coal mines, the rest goes to real estate and other industries in Shenmu, Ordos, Sanya and Beijing," he said.

Zhang Xiaochang, known as the Gold King in Shenmu, was arrested by local police in December for illegal fundraising.

He was a silversmith and owned a jewelry shop. Without any knowledge of "paper gold," he speculated on gold and silver futures. Many people in Shenmu found no other investment channels, so they scrambled for opportunities to lend money to Zhang.

"It is very simple," a local resident surnamed Meng said. "Zhang just gave an IOU note with simple information of principal and interest to people."

As told by Yang, many rich people have a low educational background in places like Shenmu and Ordos. They usually spend their spare money on material comforts and lending.

"The locals have no interest in 'small businesses,' such as express delivery, dry cleaning service and chain restaurants. They only focused on coal mines, real estate and loan-sharking, which offered quick money," he said.