Sunday, November 6, 2011

Cut off My Finger Instead

When loan sharks cornered Zhong Maojin and wanted to take over one of his pharmacies in lieu of payment, he offered them a more traditional payment. “If you like, you can cut off one of my fingers instead,” Zhong, 42, says he told them.

Giving up the store would have made it impossible to pay back another 130 creditors, Zhong said. He’d borrowed 30 million yuan ($4.7 million) at interest rates as high as 7 percent a month to expand the business. Many of the lenders were elderly neighbors who’d mortgaged their homes.
This this this. There has been a lot of press about the loan sharks, but less so about the 50% of households with their life savings tied up in this Chinese Madoff style Ponzi scheme. There is no reserve requirement in the shadow banking system and the total debts undoubtedly far exceed the total original capital. Like Lehman Brothers collapse, managing the great unwind in an orderly fashion will be difficult, to say the least. This article cites an estimate of 8% of total lending (4 trillion yuan or 630 billion $) is shadow banking.
A previous credit squeeze in Wenzhou 25 years ago affected 200,000 lenders, resulting in 523 kidnappings and more than 30 deaths, according to a local government website.
Many of Zhong's informal lenders mortgaged their houses to lend to him.
The collateralization of homes means Zhong’s problems may stretch back to the banks. One-third to a half of money used for private lending originally comes from banks, said Lu Ting, an economist with Bank of America Corp.’s brokerage unit.

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