China Foresees Massive Closedown of Loan Companies?
As China’s economy continues to slide down, the credit
crunch caused by shadow banks also becomes more serious.
As loan defaults are occurring more frequently, risks in
making loan guarantees have risen sharply.
Many loan companies are on the edge of closedown
or even bankruptcy.
If massive closedown of loan companies really happens,
it can possibly become the last straw that turns a crisis
into a disaster.
It is reported that since China’s credit crunch started among
shadow banks, almost 90% of loan companies in Wenzhou
have stopped business.
Wang Xiao, a Zhejiang entrepreneur who invested in
a loan company, told media that loan guarantors are certainly
taking huge risks right now.
As more loan defaults occur, their company will soon
be forced to shut down.
Chinese media reported on June 12 that the breakup of the
funding chain in the real economy had put tens of financing
loan companies in a hopeless situation.
Thirty-five of them are about to shut down.
In Guangzhou, banks are trimming cooperation with
Along with the economic slump, over half of loan companies
are struggling in their business.
Zhong Dajun, director of Dajun Think Tank in Economic
Studies, said massive closedown of loan companies resulted
from lack of funds, especially the lack of cash flow.
Zhong Dajun:“First, economic activities are not
as active as before.
Drop in trade and production has negative effect on business
revenues and their available funds.
In addition, banks are tightening control over loans and
it’s harder to borrow money now.
Many companies and financial organs thus fail to survive
in such a situation.”
When individuals or companies borrow money from banks,
banks may not give a loan to the borrower directly
to reduce risks.
Instead, they request borrowers to find a third party
as the loan guarantor, which are usually loan companies
or individuals with good credibility.
On the other hand, those within the loan industry said risks
of loan companies are indeed due to a flawed profit model
of the whole industry.
According to statistics released by Guangzhou Folk
Financial Street, currently the guarantee fee rate is
only about 2% to 3%.
Insiders say, 3% of guarantee fee may sound good, but once
any single loan default happens, the loss can easily even up
profits from dozens of guarantee contracts.
As a result, loan companies can only make profits with
three times of capital funds as currently.
For small to middle-sized companies, the cost rate of direct
loans from banks is reported to be about 7%.
Through guarantors the cost is about 10%.
If through other financing methods such as micro-credit
companies or shadow banks, the cost can even exceed 20%.
Gong Shengli, chief researcher at Beijing’s Internal
Reference Magazine, commented that China has a high
cost rate of capital flow in general;
this is why small and middle-sized companies have to pay
too much to get loans.
Gong said, the dual party and administration system
and a 7-level government structure result in
an overly high policy cost.
Gong Shengli:“Besides that, cost of financial operations
such as making loans is too high.
The structure of the financial system is overly complicated.
In addition, the cost of agriculture and market operation
is also overly high.
This is the most disastrous one for small to
Incomplete statistics show that China currently has more
than 8000 licensed loan companies.
Most of them service small business owners.
Only 50 loan companies have a registered capital of more
than 1 billion Yuan ($160 million).
Among these giants, over 80% are state-owned and
only less than 10 are private ones.
Zhong Dajun:“There are two systems.
One is the state-owned bank system and the other one is
the financing system for private business.”
Gong Shengli:“First, state-owned financial banks mostly
give loans to those large-scale projects and they care little
for small or middle-sized business.
Second, state-owned banks give loans at the base interest
rate, which is pretty low in most cases.”
Gong said, all China’s major state-owned financial banks
have their own loan companies.
Those loan companies usually work together with
However, most of their business result in deficits or
even capital black holes.
Yan Yipan, director of Panyuan Law Firm with expertise in
financing cases, told media that massive closedown of
loan guarantors can become the last straw that turns
credit crunch into a disaster.
Gong Shengli said, China’s small loan companies only
involve a minority of the state’s currency flow.
Therefore massive closedown will only happen if
the CCP government keeps tightening its policies
on micro-credit loans and guarantors.
Interview & Edit/YiRu Post-Production/Chen Jianmin