Asia

Wednesday, September 28, 2011 - 00:04

China Private Loan Rates Surge As Developers Struggle: Press


BEIJING (MNI) - China's private lenders are charging developers as much as 10% a month as they take advantage of the property market's demand for funding amid restricted credit conditions, state media said Wednesday.

But this explosion in unregulated private lending is spreading across the country and already leading to a rash of failures that necessitate government intervention, reports said.

Interest rates are already at 6% to 10% a month and are driving some smaller property developers into bankruptcy, the official China Securities Journal said, citing unidentified sources and without elaborating.

The reports come amid growing concerns about the financial health of China's property sector following government efforts this year to tighten onshore liquidity conditions.

Standard & Poor's warned Tuesday that weakening property sales and tightening credit conditions at home and abroad could increase risks for smaller and niche developers, who could face refinancing risks next year. A 30% drop in sales could mean even large, rated players suffer "severe liquidity strain," the ratings agency said.

The China Securities Journal cited a July report published by the People's Bank of China branch in Wenzhou, a city in Zhejiang province and hub of private lending, which estimated that 89% of households and 60% of companies in the city are engaged in the practice, charging rates of nearly 25% a year.

Wenzhou, whose outstanding private loans were estimated by the PBOC at CNY110 billion this year, up from CNY80 billion last year, is now the focus of local media reports about a wave of bankruptcies and absconded business owners as property ventures fail.

The official Shanghai Securities News said Wednesday that private lending is now spreading from its traditional bases on the east coast into relatively underdeveloped inland areas such as Henan province and Inner Mongolia as depositors chase yield.

The newspaper said the government "urgently" needs to take action and regulate the market, warning that irregularities are increasing as private funds continue to flow into the property market.

It cited the case of a Henan investment and guarantee company which collapsed in June after its subsidiary failed to meet 18% annualized interest payments after sales of a housing development fell short of expectations.

Jin Libin, a private lender from Inner Mongolia, burned himself to death in April, leaving behind CNY1.2 billion in debts, the newspaper noted.

The Xinhua News Agency acknowledged in an official commentary on Tuesday that some small and medium-sized firms -- which tend to rely on sources of funding outside the traditional banking system -- are facing financing problems and said that monetary policy is now "at a crossroads."

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