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Continued: China's campaign to clean up risky bank lending threatens credit for entrepreneurs

  • Article by: JOE MCDONALD , AP Business Writer
  • Last update: June 28, 2013 - 1:15 AM

Li, the entrepreneur in Wenzhou, said he borrowed from both state banks and informal lenders to expand his business. He said he paid 6 to 14 percent in annual interest for bank loans and up to 70 percent for underground loans.

"Is it possible to find any country whose interest rate is higher than China?" he said.

Communist leaders allowed informal lending to grow over the past decade to support entrepreneurs. But regulators began to worry after the 2008 global crisis when they found banks were putting their own money into informal lending, taking on unreported higher risks.

Money flowed to entrepreneurs to pay for equipment and raw materials but it also flooded into speculation in stocks and real estate. Regulators ordered banks to tighten lending standards but worried credit still was growing too fast.

The squeeze on China's credit markets hit after banks that quickly expanded lending this year tried to replenish their resources by borrowing from institutions that had more cash.

Analysts say bankers expected the People's Bank of China to inject extra money into that interbank market. But the central bank refused to play lender of last resort, causing a credit shortage. Interest paid by banks for an overnight loan spiked from the normal 2-3 percent to a record 13.4 percent. That ignited fears China might face a credit crisis and caused stock prices to tumble.

Some analysts said the central bank is partly to blame because it failed to make clear how tough its stance would be.

Its behavior was "extraordinarily reckless," said Williams in his report.

On Monday, the central bank blamed commercial lenders and told them to do a better job of forecasting funding needs. The official Xinhua News Agency accused banks of taking on extra risk by diverting money into speculation and unreported lending.

"It is not that there is no money but that the money is being put in the wrong place," Xinhua said in a commentary.

On Tuesday, the central bank eased off, promising "liquidity support" to banks that run short of cash.

Still, the central bank told commercial lenders again to cut back on risky practices, which will mean less credit for borrowers outside the circle of politically favored state companies.

"Small and medium-size business will take the pressure of this credit crunch, that is for sure," said Yin Jianfeng, deputy director of the finance research center at the Chinese Academy of Social Sciences, a government think tank.

Many Chinese entrepreneurs have learned to live without credit. That has made them flexible and resilient but reformers say it has held back growth of private industry Beijing needs to encourage if China's growth is to stay strong.

Elsewhere in the financial system, regulators also are cracking down on other sources of financing.

Rural credit cooperatives have been ordered to review use of promisory notes, which are meant for small transactions but are being used by banks to hide loans, Caixin said this month. It said lending using promisory notes, which don't count against a bank's government-imposed credit limit, quadrupled last year to 1.2 trillion yuan ($200 billion).

The government is taking action in part because economic planners see diminishing returns from new investments.

Bank lending surged in the first three months of the year even as economic growth decelerated. Analysts said that suggested a big share of lending went to pay off other loans or trading stocks, real estate and other assets instead of industrial investment.

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