$470 Billion in Shadow Bank Loans in China's Eastern Provinces

China squeeze drives boom in 'black' banks

About 3 trillion yuan (US$470 billion) of bank loans have been channeled into underground lending in the eastern coastal provinces, China Banking Regulatory Commission chairman Liu Mingkang told a recent closed-door conference with lenders.

About 80% of the SMEs in Zhejiang province are using underground banking loans to fund their businesses, even though the black market interest rates in the province have surged as high as 10% monthly, Cai Hua, a spokesman of the Zheshang Research Association, which represents entrepreneurs in the province, said. Zhejiang and other eastern provinces accounted for 53% of the country's GDP last year, according to the National Bureau of Statistics.

Of the Wenzhou's 360,000 SMEs, 30% have cut back operations or closed their doors so far this year, said Cai. State media have carried reports of some SMEs borrowing from underground lenders at annualized rates of up to 120%.

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"Some lighter factories just closed their companies and started a kind of lending business, which are sure to have higher net profit rates. We are tempted to do so," he said.

Wenzhou's underground banks last month processed 110 billion yuan, about 40% more than the 80 billion yuan processed in the same month a year earlier and worth about one third of the town's entire 2010 GDP of 292.56 billion yuan, according to statistics given by the Wenzhou branch of the People's Bank of China.