Loan Shark Depositors in China Protest in Hopes of Getting Their Money Returned

I've harped on this before (Loan Shark or Borrowing Walrus) but this is the first time it's shown up so baldly in the mainstream press. Ordinary people have pulled their money out of safe bank accounts and put it into high stakes shadow lending.

China's unofficial lending falters, savers protest

Ms. Zhang, a schoolteacher in the central city of Anyang, lent $43,000 last year to entrepreneurs who couldn't get loans from state banks. Now as growth cools and Beijing cracks down on informal credit, Zhang and thousands of other small lenders are unpaid and angry.

Underground lending by ordinary Chinese like Zhang flourished over the past decade, providing trillions of yuan (hundreds of billions of dollars) needed by private companies that create China's new jobs and wealth.

The most recent pyramid failure in Wenzhou officially sunk 1000 investors, unofficially sunk 5000. That's a brutal multiplier effect.

"We have no other investment options and bank interest rates are too low," said Zhang, . . .

You and everyone else, my dear. You and everyone else.

. . .who asked not to be identified further. Hopes of getting back the 270,000 yuan ($43,000) she lent are pinned on the courts so long as the government is willing to let a case proceed.

Entrepreneurs were struggling with slumping global demand when Beijing clamped down on a credit boom to cool its overheated economy. State banks cut the small amount of private sector lending they were doing while continuing support to state industry. Private companies failed and the survivors cut payrolls.

Only 19 percent of bank lending last year went to small businesses, while total loans fell 6 percent from 2010 to 7.5 trillion yuan ($1.2 trillion), according to the official Xinhua News Agency.

The underground credit market is estimated by China's central bank and private sector analysts at 2 to 4 trillion yuan ($325 to $650 billion), or as much as 7 percent of total lending. In some areas, informal lending exceeds that of official banks.

Regulators started to worry about underground lending after high returns drew state companies and civil servants into the business, blurring the line between banks and informal lending, according to Guo.

"They could easily borrow from banks and earn a profit by re-lending the money," he said. "If a problem happened, it would become destructive."

In Zhejiang province on the southeast coast, an export center hit by an avalanche of bankruptcies, 11 people have been sentenced to death since 2009 on charges of "illegal fundraising," according to news reports.

Wait, the central authority turned a blind eye to it as necessary, but it's actually illegal and can trigger the death penalty. What a business environment.

Ordinary Chinese savers still have powerful incentives to take part.

Banks pay 3.5 percent on deposits, while inflation stood at 4.5 percent in January and was as high as 7.1 percent in July. Food prices are rising by double digits, adding to the urgency of earning a better return.

Zhang, the schoolteacher in Anyang in the central province of Henan, said she lent money last March to five local companies after friends put her in touch with the owners. She said such arrangements have been routine in Anyang for more than 10 years.

"There were no problems in the past two or three years, so people believed they could make money from it," she said by phone from Anyang.

The borrowers paid 4 percent interest each month but when the six-month loan came due in September, they said they had no money left, she said.

"It was just gone," Zhang said.

Sounds like a pyramid scheme, all right.

Thousands of frustrated lenders in Anyang took to the streets on New Year's Day, demanding the government recover their money, according to Hong Kong news reports.

Police blocked some who tried to board trains to Beijing to complain to the central government and authorities in Anyang are investigating hundreds of people suspected of involvement in investment schemes.

The propaganda department of Anyang's Communist Party branch said investigators have detained 160 people and recovered 1.8 billion yuan ($290 million) out of 4.6 billion yuan ($741 million) sought by lenders.

That would be almost $2 million per detainee. Either they work really fast or they are tossing out numbers to quell panic. Or the article is talking about the Western New Year, not the Chinese one . . .

I think the boundary is, don't lose money, then it's legal. But how likely is that in a collapsing economy?