Foreclosures in Wenzhou strain guarantee companies

15,000 foreclosed properties in Wenzhou pummeling guarantee companies

Nosedives in the Wenzhou property market of up to 50% have forced some property buyers to stop making payments to the lenders and drop their guarantees to companies as their mortgages have exceeded the property's market value. Many have literally abandoned property, a tremendous fallout for the city's 300 surviving guarantee companies,

The 300 guarantee companies capitalized on the "residual value of collateral," using the remaining quota in a property mortgage to leverage a second mortgage. For example, banks, out of safety concerns, typically approved a mortgage of about 60% of the evaluated value of the property, with 40% untouched. Guarantee companies will try to offer mortgages for the remaining 40%, and claim a service fee. The entire operation relies heavily on a stable property market.

China jails 1400 for loan sharking

China jails over 1,400 in loan-shark crackdown

People netted in the crackdown were convicted of violations including public advertising to find lenders and promising excessively high rates of return, Du said at a news conference. He gave no details. Legal experts say loans between individuals are legal and the government has failed to make clear what lenders and borrowers are allowed to do.

Loan sharks have a more balanced two-sided relationship with "clients" than the term implies in the west. They are known as much, or perhaps more so, as a means to invest for outsized returns than they are as place for the desperate to borrow. So this crackdown could theoretically been entirely over fundraising.

"Banks are offering fewer loans, because the bad loan rate is rising," said Zhou. "It is harder to get underground loans, too. People are more afraid of running the risk of lending money.

100 Judges Assigned to Bad Debt Resolution

Wenzhou City Assigns 100 Judges to Resolve Bad Loans, News Says

The judges will work with 50 to 100 financial institutions starting next month to deal with soured assets in the city’s banking system, the state news agency reported yesterday, citing unidentified court officials. Wenzhou’s non-performing loans have soared to 23.86 billion yuan ($3.8 billion), from 8.6 billion yuan in 2011, according to the news agency.

That's the trouble with a shadow banking system, it doesn't have a reserve.

The judges will provide legal assistance to companies that have promising outlooks, while weeding out failing enterprises in industries with high pollution and energy consumption through bankruptcy, the news service said.

The Chinese are about to learn about the creative destruction portion of the economic cycle.

Wenzhou prices down 18% Year on Year

Wenzhou's house prices drop 18% in Q3 Largest fall in the country.

Businessmen from the city, one of China's wealthiest, are well known for their speculative activities in various sectors, especially the property market.

. . .

"Compared with the housing price for 2009 and 2010, when it rose to the peak of about 60,000 yuan per square meter for certain luxurious apartments, the average price of those is now about 35,000 yuan, a decrease of nearly 50 percent," said Ding Yi, a developer of luxury homes in Wenzhou.

Shadow Banking Blues in China

In the first six months of the year 58,000 private lending lawsuits filed in Zhejiang province (where Wenzhou is)
involving 28.4 billion yuan in private lending ($4.5 billion USD)
up 27% from 2011
highest in 5 years
600,000 lawsuits filed nationwide in 2011
valued at 110 billion yuan ($17 billion USD)
up 38% from 2010
376,000 filings nationwide first six months of 2012
up 25% from 2011
depositors seeking better returns withdrew 500.6 billion yuan ($79 billion USD) from banks in July
or 0.6 percent of total deposits.
30% of funds in Wenzhou's shadow system went to SMEs
60% went into real estate speculation and re-lending


You've probably heard the joke about the German tourist who puts a $100 bill on the front desk of the hotel and goes to look at a room. (The hotel pays the cook the cook pays the butcher the butcher pays the hooker the hooker pays the hotel and the German gets his money back when he decides not to stay.) It's an example of what it takes to unwind the tangled credit of an informal banking system where by some miracle everyone is made whole.

(Wall Street with its derivatives has become a giant informal system, one of the reasons it crashes rather than unwinds. But that's another topic.)

China's (no reserve) shadow banking system is in the middle of a great unwind. But given the chaotic nature of it, there is no feasible way to run a $100 bill through it to make everyone whole.

Shadow Bankers Vanishing Leave China Victims Seeing Scams

To live out his retirement years, He Zhongkui was counting on steady income from an investment that promised interest payments five times higher than what he could earn in a Chinese bank.

The Chinese are savers. The Chinese are savers. We hear that repeatedly in arguments against a crash. The proponents of this argument never seem to take the next step and explain what they are invested in. They are invested in their children's inflated houses and in schemes like this.

Now He, a 62-year-old former municipal official in Wenzhou who rides a rusty bicycle, is cutting back on food and gasoline, having found himself one of a growing number of victims of China’s nebulous world of shadow banking. A “friend,” who he said had been paying him 2,400 yuan ($379) a month after He gave him one-third of his 600,000-yuan life savings to invest in real estate, suddenly disappeared. So did the payments and principal.

China’s slowest economic growth in three years and a slumping property market, where many so-called shadow-banking investments are parked, are squeezing millions of Chinese who have invested the money of friends and acquaintances chasing higher yields to honor those payments.

Chasing yield. Well, we can all feel for this guy.

“It’s time for payback for the unchecked growth of China’s shadow-banking activity,” said Yao Wei, a Hong Kong-based economist at Societe Generale SA, who estimates that as much as 2 trillion yuan of underground lending may default eventually. “The risks are culminating, and part of the system is doomed to collapse. On the flip side, this gives policy makers an opportunity to put in place oversight for a sector that should have been regulated a long time ago.”

Private lending between Chinese individuals is believed to be worth $1.3 trillion, according to Boston-based research firm IHS Global Insight (IHS), the equivalent of the 2011 U.S. federal budget deficit. Interest rates can reach as high as 100 percent.

In the heady days of blockbuster growth, maybe one's business could carry that kind of load. Maybe. The ones who couldn't rolled the debt, if they could.

The lending is part of a shadow-banking system that also includes the off-balance-sheet business of banks and trust companies and totals as much as $2.4 trillion, about one-third of China’s official loan market, according to estimates by Societe Generale. Shadow banking is prevalent in China because more than 90 percent of the nation’s 42 million small businesses are unable to get bank loans, while such investments offer returns at least several times higher than deposits.

The numbers just keep getting worse.

Another Wenzhou shadow-banking victim, Mao Renye, said he took out a 700,000 yuan bank loan last year at 10.8 percent annual interest, using his home as collateral, to help his son’s struggling clothing business. Enticed by a 36 percent interest rate promised by a city resident who ran a nationwide pharmacy chain, the 69-year-old former farmer-turned-businessman said he invested 550,000 yuan, only to find that the borrower’s company was on the brink of bankruptcy and dozens of creditors were chasing him for repayment. Mao didn’t get any money back.

The nightmare didn’t end there. As his bank loan matured in October, Mao had to borrow from friends, relatives and loan sharks to pay back the debt so his home wouldn’t be seized. Now he’s seeking to sell his 2 million-yuan home to pay off his borrowings. No buyer has shown interest, he said.

In Erdos, about 150 kilometers (93 miles) south of Baotou, 80 percent of housing-construction projects are halted after home prices tumbled to 3,000 yuan per square meter from a record 20,000 yuan per square meter, Caijing magazine reported Sept. 3. The biggest source of funds was private lending, and as defaults surged this year people began greeting each other by asking how much savings they were able to retrieve from their shadow- banking investments, the report said.

It goes on, read the rest

China's Exports Hit Hard

The current climate is growing more difficult than the 2008 crisis. Profits slipped 5.4% year on year for July. China's export hub hit hard by global economic slowdown

In the first seven months of this year, profits for industrial firms fell 2.7 per cent from the same period last year to 2.68 trillion yuan. It is 0.5 percentage points more than the decrease for the first six months.

In the first seven months, state-owned and state- controlled industrial enterprises saw their profits fall 12.2 per cent from a year earlier to 784.7 billion yuan, (about $124 billion).

This is interesting. Non-state owned industrial, because of its long-term uncertain access to capital and influence, could be presumed to be operating more leanly.

But it has witnessed a rise in bankruptcies that is even "more serious" than the 2008-09 financial crisis, said Zhou Dewen, Chairman of the Wenzhou SME Development Association.

"We have about 3,000 members and more than 10 per cent have closed down and about 20 per cent are struggling," Zhou said.

These are SMEs. Larger companies are better able to adapt, based on the stats below:

According to a report released by the financial and economic committee of Zhejiang Provincial People's Congress, 140 out of 3,998 large enterprises in Wenzhou closed in the first half of the year while 57 percent of those large companies cut production.

Meanwhile Rate Swaps again hit a three month high. Reuters article. Those capitalists (just like in the rest of the world) just hanging on the government's every currency and liquidity move.

"I am waiting for the market to recover"

Betting on another 700 billion dollar stimulus from the central government, I guess?

The market has been decimated. On average only one luxury apartment is being sold a month. Selling now means a 30% loss. Selling later means, what?

There was a round of forced sales when the shadow banking system first collapsed. That sales are so slow implies that maybe that's calmed down.

Wenzhou investors sit tight as housing prices stall

"I bought most of my properties before 2010, when the restrictions were imposed, and I am waiting for the housing market to recover, which will happen sooner or later," said Zhuang Chen, an investor from Wenzhou who owns 30 properties.

Staying calm and waiting for the property market to recover is the best option for investors at the moment.

Every bubble, every country. Same idea.

"I haven't seen a single investor in the past half year coming to me for new luxurious apartments, which are mostly empty for the moment," said Zheng.

Oh, unbelievably slow sales and a massive oversupply. Yeah, that market's coming back.

Negative equity in Wenzhou and Japanese "lending in the dark"

Of course the money was borrowed. From family, from bosses even. Real estate speculators in Wenzhou of China are facing negative equity

According to one real estate speculator in Wenzhou, speculators obtained about 70% of their funding through banks and/or shadow banks, Yicai reports. According to the report, prices of newly completed properties in Wenzhou have fallen by about 30-40%. As a result of that, about 80% of the speculators are now probably in negative equity (i.e. the outstanding debts are larger than their real estate investments). Some creditors are demanding repayments, and flats are being repossessed by banks and creditors in some case. Some speculators simply ran away.

Meanwhile shadow lending in Japan may be on the rise soon.
Loan-Shark Lending Surge Feared In Japan

Lured by a tabloid newspaper advertisement offering a “heart-warming” credit plan, he went to the building the lender shared with tenants including prostitution agencies in Tokyo’s bustling Shinjuku district. With the door of the eighth- floor office locked behind him, he said he took out his first yamikin loan: 50,000 yen at 27,000 yen interest a week, which works out to 2,800 percent a year. “To repay loans from a non-bank, I borrowed money from a yamikin,” Yoshida said, “and to repay that, I borrowed from another yamikin.”

Soon he owed money, debts mostly in the range of 50,000 yen, to 96 loan sharks all over the Japanese capital. Illegal lenders called him and threatened his parents’ lives if he missed payments. They also recommended he sell one of his kidneys, Yoshida said.

The opposition Liberal Democratic Party’s financial committee in May unveiled a plan to scrap the part of the law that limits credit to a third of a borrower’s income, and to lift its current 20 percent cap on loan interest rates to 30 percent.

By the way, the Liberal Democratic Party is neither Liberal nor Democratic, it's conservative.

Taira, whose family owns a small vegetable wholesaler with 3 billion yen annual revenue, said in an interview. “What we need is increased counseling to protect people with heavy debts.”

He really thinks it's feasible to control appetite for debt through counseling rather than pricing?

Given the extremely poor returns in an ultra long term low rate environment, you'd think 20% interest would already be enough to generate enough volume in credit.

Tightened regulations helped reduce the number of debtors with at least five unsecured, unguaranteed loans from consumer- finance lenders to 440,000 people in March from 1.7 million five years earlier, Financial Services Agency data show. Loans from such firms, including Acom (8572) Co. and Aiful (8515) Corp., declined 40 percent over five years to 26.1 trillion yen as of March 2011, according to the data.

“Decisive regulation tackled the social issues very well in the late 2000s, dealing a blow to yamikin lenders,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo. “But the remedy carried an economic side-effect that’s driving lawmakers to seek a revision. Mom-and-pop business owners who want quick, short-term cash haven’t been able to borrow as much as they used to.”

The person, who asked not to be named because of his association with the organization, said he used to lend money to small-business owners at rates ranging from 5 percent a month to 10 percent a week. Dressed in a pinstriped suit and missing his little finger, he said he found it harder to collect on loans after the crackdowns and passage of the various laws. Now, he said, he’s concentrating on making money from other lines of business, including trading stocks.

China's Small Business Paradise Struggling

The collapse of the shadow banking system is just one of many headwinds facing businesses in the freewheeling area of Wenzhou.

Of the businesses that are doing well, expansion is impossible, loans only go to large, or well connected firms, and small businesses cannot get government permission to buy land to consolidate their production to a single facility. There is also a lack of online sales skills locally. And on top of it all labor costs and the Yuan are rising. In China, small business no longer booming

After years of easy loans and cheap labor, small-business owners in this prosperous coastal city of 9 million say they are facing strong headwinds: slowing export growth, rising worker costs and a drought of loans for anyone but the biggest businesses.

Whereas small businesses could once easily get loans from the city’s bustling “shadow banking” sector, a rash of defaults and suicides by debt-ridden businessman has caused the system to collapse.

“Shadow banking” here involved private lenders who illegally — though sometimes with government officials’ involvement — loaned money to small or medium-sized businesses at high interest rates. Many firms in Wenzhou used this underground financing because commercial banks typically loaned only to state-owned companies or huge corporations.

Bad Loans in Wenzhou at Ten Year High

Non-Performing Loans in Wenzhou Surge to Ten Year High

The ratio more than doubled from 1.33 percent in January to 2.69 percent as of the end of June. Zhang Zhenyu – the official responsible for regulating Wenzhou banks – said commercial banks in the city are well positioned to absorb NPL ratios as high as 4 to 5 percent, according to Caixin Online. He also said only 0.5 percent of the NPL's or less than 1 billion yuan were expected to default.

The numbers seem low, overall, given other quotes that sour loans to SMEs are 30-40% of book. If one assumes the numbers are fabricated and then numbers can be reported as anything, then this seems like a strong signal from the banks to the powers that be that something has to change.

It's clear that investments are starting to go bad in the traditional banking sector in Zhejiang, and that could be ominous for the country's enormous shadow banking system, which comprises around 20 percent of all of renminbi-denominated loans in China. After all, shadow banks lend to much riskier borrowers who can't typically get loans from traditional banks.

. . . many of them appear to be no more than a leveraged play to arbitrage between official (low) interest rate and market driven (high) interest rate. With this type of business model, the music tends to stop when loan demand starts to weaken and their investments start to go bad. Their thin capital base can be wiped out fairly quickly when this happens.

On China's fudged data, Lying Libor Is Nothing Compared to China’s Fake GDP: Report

Annual gross domestic product came in at 7.6 percent in the second quarter, according to China’s government on July 13th. The report was better than investors expected, easing concern of a dramatic slowdown for the world’s second-biggest economy and sparking a bid in risk assets like stocks that has lasted for two weeks. But slowing imports and industrial production, as well as harder-to-fudge electricity usage data, points to much slower growth, according to McDonald and other investors. Barclays believes the number should have been more like 7.15 percent.

Add onto that recent reports of coal piling up at power plants because electricity demand is falling.

Ongoing shadow banking risks

Not a very well written article, but it revives some points I find interesting. Formal lending in the past has only helped fuel shadow lending, but through other mechanisms than those mentioned here. If you are a state owned enterprise, this is easy: Get a loan for just about anything, turn around and lend the money as a loan shark. If you are not a SOE and you are under financing restrictions: get a loan for copper, buy copper, then use proof of its warehousing to obtain new money that has no restrictions on it. Whether new formal lending is fueling more shadow banking . . . there isn't proof of that in the article. Other articles cite a seizure of the shadow banking system in Wenzhou, where no one has the funds to pay anyone else. If any one player in such a chain gets access to formal funding and uses it to cover their shadow debt, I'm not sure the other players in the chain wouldn't just breathe a sigh of relief and continue to hold their remaining funds close and keep trying to collect on what is owed them. As to the non performing loan ratios. They are clearly wrong, as the bad loans from the previous bank crisis in the late nineties are still on the books and would represent something like 30% NPL by themselves. I take that as some kind of political signal that they are rising at all. That's interesting, given that the numbers are whatever they want them to be. China's Shadow Banking Risks Are Spreading Through The Financial System

Non-performing loans in Zhejiang banks continued to rise. Investigations by the regulatory authorities looked at 170 companies which obtained loans from banks, and found that 70% of these companies under investigation had signs of over-capacity, involvement in real estate investment and informal lending, with 90% of loans classified as “bad”. In fact, non-performing loans have been rising in Wenzhou for 11 consecutive months to RMB4.5 billion, with the NPL ratio at 2.43% at the end of May, and far higher than the national average (if both numbers are to be trusted, of course).

Pilot Lending Program in Wenzhou Falling Short

Worst of Chinese Slowdown Seen in Wenzhou as Stimulus Limited 

Jiang Xiangsong has 18 days to pay a 2 million yuan ($314,000) bank debt or his suitcase company in eastern China will go bankrupt. He's close to tears as he realizes his last hope, a government-backed office, won't help.

Wenzhou's more than 400,000 businesses make everything from shoes in dusty side streets to synthetic leather in dilapidated factories, much of it financed by unregulated lenders that spread during China's record 2009-10 credit boom. The decline of so-called shadow banking in the city, triggered by Wen's move to rein in a national property bubble, has left Wenzhou bearing the brunt of the country's economic slowdown.

I don't know about that particular cause and effect. The shadow lending bubble could have collapsed on its own. It is all mixed up with property, which was being liquidated to pay business debts.

"This is the worst year," he said as he waited for customers to buy sneakers from his half-empty shelves. "This place used to be packed with buyers from around the country, now it's full of unsold shoes."

On a recent morning, a single coach pulled out of Wenzhou's main long-haul bus station into an almost empty street. A few years ago, the road was a permanent traffic jam, clogged with buses and migrant workers arriving from other provinces, according to Liu, a taxi driver who like many people in China declined to give his full name.

All of this investment has been toward the goal of assimilating the Chinese peasant into the modern urban world. A reversal was not planned for.

Businesses are suffering because of weak demand, higher raw material costs and rising wages, as well as the breakdown in the system of unregulated money lenders who fund much of China's enterprise, said Zhou Dewen, head of the Wenzhou Small- and Medium-size Enterprise Association.

"Wenzhou's private lending system was built on trust, and now that trust is gone," said Zhou. He estimates there is about 1 trillion yuan of idle private capital in the city because "nobody is willing to lend to others."

Suitcase exporter Jiang, 45, said that before last year he would have had no problem raising the 2 million yuan he needs with a few phone calls to friends and fellow businessmen. Now, nobody answers the phone. Last week, Jiang's landlord refused to give him more time to make a payment on the 200,000 yuan rent for his factory because the landlord himself is short of cash after closing down his apparel business.

"Everyone around me is struggling," said Jiang, whose company's sales have dropped 60 percent this year.

Wild West Wenzhou Part II

There are things the Chinese have not seen in this lifetime. They've never seen real estate prices fall (mortgages were only allowed in the late nineties) and they have apparently never seen a pyramid scheme. I wonder where Guo Chuanzhi landed? Was he already a naked executive? (meaning has he already sent his family overseas). E-commerce boss stole US$158m, then vanished

The victims said they paid a lot of money in hopes of high returns. The site charges a commission fee for each transaction but does not ask for proof that goods were sold. An agent surnamed Ye, who paid more than 60,000 yuan in the past three months, said it appeared profitable as every 575 yuan paid, including commission, could earn 365 yuan a year in return. She said that agents also could earn money by recruiting other agents.

1 billion yuan or $158 Million is a pretty good take in a country averaging $4000 income a year.

The Wild West of Wenzhou (Update)

Update: They have arrested this guy

Lin and his six partners were captured in Zhuhai, a city in southern Guangdong Province, on June 9, more than two weeks after he disappeared.

Since he is not a cause celeb, I doubt there will be a stay of execution this time.

---

Back in March there was this amusing story:

Wenzhou businessman's bank acquisition a fraud

Lin Chunping, a member of the Wenzhou Municipal Committee of the Chinese People's Political Consultative Conference (CPPCC), made headlines last month when he said in a report that he successfully acquired a failing U.S. bank in Delaware.

Lin did not provide the name of the bank in the initial report. After rising to fame for having supposedly broken ground in becoming the first Chinese national to own an American bank, he was asked to provide details about the acquisition.

"Under the pressure of the public opinion, I have to release the name of the U.S. bank that I negotiated with: Atlantic Banking Corporation. I could be fined of a large amount of money due to the leaking of secret," Lin wrote on his micro-blog.

Wait, what? He then said that he had changed the name of the bank to USA New HSBC Federation Consortium Inc. I love that name. It's such a beautiful intersection of bluster, pretentious false legitimacy, and copyright ripoff all rolled into one.

Short version of the story, someone actually goes and checks the records, conveniently online and realizes he's making all this up. This brings up questions as to the mentality here. Does he not realize records are public? Does he expect his bluster will keep anyone from checking?

Well, Mr. Lin is back in the news and has disappeared.

Wenzhou investor wanted by police in possible tax scam

"Police have confirmed that Lin has fled the city," said Zhang Xunting, deputy director of the information office of the city government of Wenzhou, Zhejiang province. Local police believe the 42-year-old Lin was involved in requesting several companies under his control to illegally issue value-added tax invoices to cheat tax authorities of export tariff rebates, according to Xinhua News Agency.

Lin's case may deal a new blow to Wenzhou's small businesses, which have already been trapped by the aftermath of the financial crisis and the meltdown of the city's once prevalent shadow lending.

"What Lin had done has brought down the reputation of businesspeople in the city," said Zhou Dewen, chairman of the Wenzhou Small and Medium-sized Enterprises Development Association.

Giving business bluster a bad name.

China won't back off the property restrictions

Prices fell in 46 of 70 cities tracked. This compares to drops in 37 cities in March.
Prices fell the most in Wenzhou, 12.3% year on year.
Stimulus measures like Beijing offering first time buyer mortgages below the benchmark rate. Yangzhou will offer subsidies up to .6% of purchase price. Attempts by other localities to lift the central government's property curbs were stopped within a week. Home prices in decline in record number of Chinese cities

Private data also showed the home market continued to cool. April home prices fell to a 14-month low, SouFun Holdings Ltd., the nation’s biggest real estate website owner, said on May 2. Residential values decrease 0.3 per cent last month from March, the eighth month-on-month drop, said SouFun, which began compiling the figures in July 2010.

A gauge tracking property shares in Shanghai fell 1.7 per cent at the close of trading, compared with a 1.4 per cent loss for the Shanghai Composite Index.

Industrial & Commercial Bank of China Ltd. suspended a 15 per cent discount on mortgage lending for first-time home buyers nationwide, the official Xinhua News Agency reported on May 5. The suspension was made to address tight liquidity and deposit instability and other Chinese banks may follow suit, Sophie Jiang, a Hong Kong-based banking analyst at Religare Capital Markets, said in a May 7 report.

“The government won’t back off from the property restrictions,” Patrick Chovanec, an associate professor at Tsinghua University’s School of Economics and Management in Beijing, said before Friday’s release. “If they lift the restrictions and the market keeps falling, which it will, they’ve lost the fig leaf that enables them to say they’ve got everything under control.”

"Chaos if the curbs relaxed" -- Wen Jiabao

China Home Prices Post Worst Performance in a Year on Curbs Why the word "performance"? It's not supposed to be speculative. It's shelter. This is a big part of the problem. Words mean things.

Relaxing the curbs could cause "chaos" in the market, [Premier Wen Jiabao] said

This is the stare down contest of all time. This man is not going to blink.

New home prices fell in 27 of 70 cities last month from a year earlier and prices were unchanged in six cities, the national statistics bureau said in a statement on its website yesterday. That is the worst since the government began at the start of 2011 releasing individual data for 70 cities instead of a national average.

Note, this is NEW home prices.

The eastern city of Wenzhou posted the biggest drop for the fourth month, with home prices declining 0.5 percent from January and 8 percent from a year earlier, according to National Statistics Bureau data. A credit squeeze on smaller businesses in the city prompted Wen to visit in October and pledge financial aid.

There are anecdotes of private property liquidation to cover business costs and loan shark debts. Makes sense that Wenzhou would be the hardest hit given the collapse of the private lending sector. Property shifts money from the official banks (via mortgages) into private lending. (e.g., The person you buy the apartment from takes your mortgage money from a state bank and pays off their loan shark.)

Existing home prices in both Beijing and Shanghai dropped 0.2 percent from January, according to the statistics bureau.
. . .
The country's home sales declined 25 percent in January and February, according to data from the statistics bureau on March 16. The value of homes sold fell 25 percent after surging 26 percent in the first two months of 2011.

And speaking of chaos . . .
China’s Stocks Rise on Support Measure Prospects; Chalco Climbs

The Shanghai Composite Index (SHCOMP) rose 1.36 point, or 0.1 percent, to 2,378.20 at the close. The measure climbed 0.8 percent after the 21st Century Business Herald reported that as much as 40 percent of Guangdong province’s 100 billion yuan ($15.8 billion) of pension funds may be invested in stocks. The index later fell as much as 0.7 percent after the government said the money will “mainly” be invested in bonds.

Hat tip: pension pulse

Officials Aided Loan Shark So They Could Recover Their Investment

Officials Sued over Fundraising Promotion

The Taishun County government and police security bureau are accused of promoting the Liren Education Group's fundraising activities despite knowing the company was hugely in debt.
More than 7,000 individuals lent 4.5 billion yuan to the company between 1998 and 2011, China Business News reported yesterday.

ccording to the lawsuit, this explained why the local government turned a blind eye to Liren's fundraising activities. It also alleged that, faced with Liren's alarming debt, top officials went on local television to encourage people to help the group.
More than 80 percent of the households in Taishun County became entangled in the fundraising fraud while other victims came from the neighboring Jiangsu and Fujian provinces and north China's Inner Mongolia Autonomous Region.

China's lending scam victims seek state compensation

The county government and police turned a blind eye to Liren's lending scam, especially allowing the company to gather nearly 900 million yuan from private creditors on the false promise of high returns in the final four months before bankruptcy, according to the litigation, adding that some officials even participated in the scam themselves.

When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors, they added.
Liren's downfall again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy.
Last year, a survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors because small companies have difficulties securing loans from banks.

Creditors Register in Liren Collapse in Wenzhou

This case is a harbinger of what is to come as part of a messy unwind in China. Wenzhou is the epicenter of publicly funded lending.

Firm risks bankruptcy amid lending fight

The Beijing-based newspaper Economic Information reported on Friday that more than 7,000 people have registered as being creditors of Liren Group, but local authorities said the number is much smaller.
"We started to register creditors on Tuesday, and more than 200 people register each day on average," said the director of Taishun county's information office.

Liren Group, a company that started by opening a private school and later came under suspicion from authorities during a government campaign against illegal fundraising, may have to declare itself insolvent, the auditing firm said on Friday.

"I expect its net assets are lower than half of its debts, which surpass 4.5 billion yuan ($700 million), according to the company's financial statement," said Liu Xuhai, chairman of the Zhongyuan Auditing Firm.

Apparently this is one of the warning signs of an imminent collapse in one of these schemes:

In November, the company announced it would stop paying off debts in cash, citing "financial difficulties". Instead, it offered to repay creditors using debt-to-equity swaps, property and free school tuition.

(Liren was originally a school. Before it got into real estate and mining and a host of other things.)

Real Estate in all tracked Chinese cities fell in January

The Lunar holiday was a bust for the top four cities.

China Jan. Home Prices Worst in a Year

Prices in 47 of the cities fell, while home values in the remaining 23 were unchanged from December, the National Statistics Bureau said in a statement on its website on Feb. 18. New home prices in the nation’s four major cities of Shanghai, Beijing, Shenzhen and Guangzhou declined for a fourth month. None of the cities posted gains in home prices for the first time since the government began releasing at the start of 2011 prices for 70 cities surveyed instead of a national average.

The eastern city of Wenzhou posted the biggest drop for the third month, with home prices declining by 0.6 percent in January, according to the Statistics Bureau. A credit squeeze on smaller businesses in the city prompted a visit and pledge of financial aid from Wen in October.
“Wenzhou and other eastern coastal cities are liquidity- sensitive,” said Alan Jin, a Hong Kong-based property analyst at Mizuho Securities Asia Ltd., adding that prices dropped in these cities as “entrepreneurs with high-yield debt may have just sold off their properties for cash.”

China Daily on the State of Private Lending

Borrowers face costly payback

The Supreme People's Court deems private lending illegal when the interest rate is four times higher than that of a commercial bank. Yet, while the current average is from 6 to 7 percent a year, some underground banks are lending at an annual rate of up to 90 percent.
According to the survey of Zhejiang businesses, roughly 9 percent of respondents said they "frequently" borrow from private lenders to ensure cash flow, with 47 percent doing it "occasionally".
The most recent data from China's central bank also supports this theory. It stated that private lenders had loaned 3.38 trillion yuan ($536 billion) last year by May.

With the rising costs of labor and materials and the tightened bank policies, he said that the government crackdown on private lending had been the last straw. "We just hope something concrete can be done sooner or later," he added.
According to Zhou's association, Wenzhou until recently had about 160 private lenders and "guarantee organizations", which are companies or individuals who stand as guarantor on loan applications. Today there are no more than 20.
One lender, who gave his name only as Fu, said he will not even lend money to relatives nowadays, explaining that once the money is "out of my hand, I have little chance of ever seeing it again".
Nine out of ten lenders mostly bankrupt bosses will take the money and flee, he said, adding: "It's a vicious circle."