Chinese government cracks down on underground lending

Underground lending has become common within the Chinese business community as the government-owned banks tighten up on liquidity as part of efforts to cool the property sector.

However, the authorities forbids this kind of uncontrolled lending, and in the last two years has sought to crack down on underground banking.

Since the crackdown began in 2011, more than 1,400 people have been sentenced to prison terms of at least five years for involvement in this type of financing, Du Jinfu, a public security ministry official in charge of a task force on underground lending said last week.

Shadow finance
The investment bank Sanford C Bernstein estimates that shadow finance in China totals about 20 trillion yuan (€2.45 trillion), or a third of the current size of the bank-lending market.

Shadow banking in China includes banks’ off-balance-sheet vehicles, such as commercial bills and entrusted loans, as well as underground lending by individuals.

The reason it is booming is because more than 90 per cent of the nation’s 42 million small- and medium-sized enterprises (SMEs) – find it difficult to get bank loans.

In 2011, only 19 per cent of bank lending went to small businesses, while total loans fell 6 per cent from 2010, according to the Xinhua news agency.

While the Communist leadership has promised to free up bank lending for private sector entrepreneurs, they still have difficulty getting loans, and the state banks favour the state-owned enterprises when it comes to issuing credit.

These informal loans are arranged by brokers, who are paid a fee and borrowers can pay interest of 70 per cent a year or more.

Imprisoned
The 1,449 people imprisoned were among a total of 4,170 people convicted since 2011 of violating rules on loans outside the state-run banking system, said Du. The others received lesser penalties.

They were convicted of violations including public advertising to find lenders and promising excessively high rates of return, Du told a briefing.