From Nation Page 10 Issue 374 June 30 2008
Translated by Liu Peng
Original article: [Chinese]

One summer afternoon, a middle-aged woman came to Fang Peilin's office enquiring if he could help her to "dispose" of 30 million yuan.

What the woman was insinuating was to loan out her savings to a 6% monthly interest rate, which amounted to around eight times more than the annual loan interest rate demanded by commercial banks in China.

The collateral she required would be fixed assets like land or having Fang as a guarantor. In fact, Fang is just one of many businessmen making a living as a guarantee agent in Wenzhou. 

In Wenzhou – China's private capital powerhouse in the southern province of Zhejiang – the usury business has been thriving, with huge funds channeling through guarantee companies like the one Fang headed.

These guarantee companies serve as banks for private capital, often skirting the law by taking savings from individuals and lending them out at exorbitant interest rate.

Wenzhou has become a hot bed for such lending activities mainly due to massive reserves of private funds anxiously looking for investment opportunities. The excess liquidity has resulted from investment in real estate and coal mining, as well as industrial capitals.

On the other hand, many small and medium enterprises have been facing cash flow problems as banks tightened lending policy in line with the Chinese government's macroeconomic controls. At times, businesses only needed short term credit to tie themselves over, and the underground usury business provided options of daily or monthly interest rates.

Another kind of Guarantee Company
Fortune center is one of the most magnificent office towers in Wenzhou. The majority of the companies based there are guarantee agencies, asset management and investment consultancy firms.

Yet, industry sources revealed that most of these companies were in fact dealing in the usury businesses.

China introduced credit guarantee agencies in the mid 1990s. Initially these agencies were mainly government invested and policy driven, charged with improving loan access for local small and medium-sized businesses.

Over the years, the credit guarantee industry flourished under rapid economic growth, with more and more private capital joining the line, providing guarantee services to real estate, businesses, investment and more. To date, there are some 240 such companies in Wenzhou alone.

Seven years ago, Fang Peilin established the first guarantee company in Wenzhou---Wenzhou Fangxing Guaranty Company---to provide cover for enterprises asking for bank loans and financing. At that time, the monthly interest rate was within 3%, not more than four times of that demanded by banks.

Later, Fang introduced new services that in his words benefited four parties – the bank, the borrower, the guaranty agency, and a third party.

Under the new services, when a borrower's collateral was insufficient to obtain a loan he needed, the guaranty agency would find a third party to top up the value of collateral using a property title or bank deposit, thus realizing the borrower's access to bank loan.

As a result, the bank got more deposit (collateral) and client, the borrower got the funding, the third party earned a fee, and the guarantee agency received commission.

Fang started advertising the new services in early 2006. The response was well beyond his expectations: That year alone, he provided coverage for some 150 million yuan worth of credit guarantee.

Fang stressed that all his operations conformed to law, with banks as the backend of loan and fund providers. Yet, he revealed that some guarantee companies had already sidestepped the banks and directly arranged for a third party and a borrower to seal the credit deal, which had given rise to underground banking.

The Underground Credit Chain 

A fund provider in the underground usury business usually sourced for a credit guarantee company through word of mouth. At times, the level of trust between the two parties was so strong that no paperwork was involved, said industry sources.

Like the bank, a guarantee company would also investigate a borrower's credit history and assess the value of his mortgaged assets, which must be higher than the value of loan required, prior to providing loan.

A fund provider would usually ask for an interest rate of between 1% and 3% from a guarantee company, which in turn charged a borrower a 6% rate. Sometimes, guarantee companies only served as go-betweens for a credit deal and such a service involved only a referral fee of some 3% of the loan amount.

If a borrower failed to repay a loan when the contract term expired, the guarantee company or the fund provider involved could file for a court to auction off the borrower's assets.

Last year, public complaints against usury businesses had led to the Zhejiang provincial government to dispatch an investigation team to Wenzhou.  

Yet, Wang Tao (alias), manager of a guarantee company there, said underground credit channels had contributed to the economy under tight monetary policy. He said when commercial banks suddenly tightened their credit policy, many small and medium enterprises were left in a lurch.

Prior to that, easy access to bank loans had encouraged many companies to undergo business expansion and set up more production lines. When banks started to cut funding, these enterprises had no choice but to source for underground fund raising to keep up with production.

Last year, the total liquid capital in Wenzhou reached some 300 billion yuan, of which credit capital in the hands of civilians amounted to some 50 billion, according to Zhang Zhenyu, director of the finance office under the Wenzhou municipal government.

According to Wenzhou official information, local enterprises had three major sources of funding – self-funded, bank credit, and private fundraising among the community. Presently, the ratio for each of these funding stood at 54:18:28 respectively.

Local banking watchdogs had once performed a survey among 400 private fund raising agencies and found that 80% of the loans obtained were invested into production or business operation.  

Zhang said a way to solve underground fund raising was to allow the establishment of micro-credit companies with a capital around 500 million to 1 billion yuan. By allowing private capital to legally provide loans would enhance local enterprises' credit access and improve legal protection for all parties involved, he added.