A rural bank in Yuncheng, Shanxi province. (File photo/Xinhua)
Private lending in China has shrunk sharply as more wealthy people divert their funds into safe bank deposit accounts. Many hard-pressed businesspeople are unable to get needed capital from banks either because financial institutions have tightened credit also for fears of higher risk concerning nonperforming loans.
The vicious circle is driving more small and medium enterprises to the brink of collapse.
Zhou Dewen, head of the SMEs Development Association in Wenzhou of China's eastern Zhejiang province, told the National Business Daily that the private lending market in the city is expected to contract by 30% to only 80 billion Chinese yuan (US$12.7billion) this year from 120 billion yuan (US$19.05billion) in 2011.
Similar situations are taking places in other areas, including northern Shanxi province, said financial analysts.
Zhou said the credit crisis erupted in Wenzhou last year and the slower growth in exports this year have combined to prompt affluent citizens to retract money from the private money market and temporarily park their funds in banks for safety. However, banks have also turned more conservative in extending loans to the SMEs in spite of increased deposits from customers.
The proportion of NPLs at banks in Wenzhou had long been the lowest at only 0.37% in all areas of mainland China. But the figure already surged to 1.74% by the end of February and further to all-time high of 2.85% in July, estimated research firms monitoring financial and real estate markets.
Outstanding loans in the private market of Shanxi also dropped by 30% by the end of March from September 2011.
In Ordos, a thriving city in Inner Mongolia known for coal and other natural resources as well as booming property market, businessmen could easily get fund up to one million yuan with a simple IOU slip from private lenders during peak business seasons in the past years.
But it is now a different situation. Private lending still increased to 48.19 billion yuan (US$7.7 billion) in the January-May period, but the growth rate fell to 22.6% for a higher gain of 27.7% in the same five months of last year.
Meanwhile, the total amount of citizens' bank deposits in Ordos has risen to a historic high of 12 billion yuan (US$1.9 billion).
Private lending has played an important role in meeting the capital needs of businesspeople as the transaction value of the market sector across China amounted to more than four trillion yuan (US$636 billion) in 2011, accounting for about 10% to 20% of total bank loans, according to a research study of CITIC Securities.
Analysts said that in addition to temporarily depositing their funds at banks to control risks in private lending, wealthy people have also increased investments in other sectors like property markets in smaller cities in other areas that are still not subject to tight government restrictions in order to pursue higher return on investment.
The trend has aggravated the squeeze on enterprises that often rely on short-term borrowing on the private market for long-term loan repayment to banks.
The slowdown in Chinese economy and export sales are inflicting impact on many corporations.
There are now more than 3,000 enterprises of medium and large sizes in Wenzhou and over 60% of them have either decreased or suspended manufacturing operations due to reduced orders, said Zhou.
Analysts interviewed by the National Business Daily said the government as well as local and regional banks should not restrain the lending to credit-worthy SMEs so as to help them tide over operating difficulties and further push interest rate liberalization.
Bank loans still carry much cheaper costs for businesspeople even when financial institutions charge various interest rates on borrowers based on different credit standings.
Even marketing representatives at some banks complained that their financial control departments are now withholding too long to endorse lending to companies with normal business operations.
The upcoming year-end period of October to December has long been the toughest quarter for enterprises every year and many enterprises could go bankrupt if the banks are unwilling to lend a helping hand at the critical time, warned the analysts.
Zhou Dewen 周德文