Credit Squeeze With Chinese Loan Sharks

Bloomberg has picked up the problems emerging in China regarding private lending, which I mentioned in a previous post. I present China Credit Squeeze Prompts Suicides, Violence:

Hours after a creditor and his gang of tattooed thugs hustled Zhong Maojin into a coffee shop in Wenzhou, he says he wouldn’t yield to their demands.

They wanted to take over one of the pharmacies in a chain he’d built by borrowing from private lenders. Instead, he made an offer of traditional retribution in this eastern Chinese city, known for loan sharks who have sometimes meted out violence to bad debtors.

“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....

Small and medium-sized businesses account for 80 percent of jobs in China, according to the country’s industry ministry. Yet they’re largely unable to get loans from banks, which prefer collateral to cash-flow...

Private lending in China doesn't always involve thugs. In fact, it is a way of life for many Chinese. They don't trust their stock market, and there is no social safety net. So they put their money to work in business owned by friends, family, or in their 'clan'. But it seems some Chinese are using their homes as collateral to get bank loans which they then lend out again to businesses

They built a lattice of interlocked credit, often borrowing from banks and other private lenders to arbitrage interest rates. Taking out bank loans at 1 percent a month, many lent out their cash for 2 percent or higher a month. They pocketed the difference to supplement meager income from odd jobs.

Sitting on a small stool, gray-haired Jin Xiaoyu fills a wooden box with the electrical clamps she makes to earn 10 yuan a day. Her left eye is the milky-white color of a cataract and she says she has difficulty seeing.

She lent Zhong 50,000 yuan and charged 1,000 yuan a month in interest, she said.

“I worry that I cannot get the money back,” Jin says. “I hope the government will help him out.” Some used their housing as collateral. Among them was Wu Suihua, who borrowed against her five-story home, she says

When I hear things like this I get nervous about China. And then we have "HK home sales fall over 50% in October":

HONG Kong's home sales fell for a 10th straight month, dropping by half in October from a year ago as buyers put off purchases...

Real estate prices, which have surged over 70 percent since early 2009, fell for the first time in seven months in July after the government introduced new housing curbs in June. Banks raised mortgage rates in September.

And I look at the Shanghai stock market, which is down almost 2o% in past 12 months:

Are we finally seeing a significant slowdown in China?