China’s unofficial lending market

BEIJING (AP) — Ms. Zhang, a schoolteacher in the central city of Anyang, lent $43,000 last year to entrepreneurs who couldn’t get loans from state banks. Now as growth cools and Beijing cracks down on informal credit, Zhang and thousands of other small lenders are unpaid and angry.

Underground lending by ordinary Chinese like Zhang flourished over the past decade, providing trillions of yuan (hundreds of billions of dollars) needed by private companies that create China’s new jobs and wealth.

Its popularity reflects public desperation for an alternative to China’s banks, which pay low deposit rates that fail to keep up with inflation and channel savings to government companies.

But the high cost of underground credit — interest rates of 70 percent a year or higher — and a slump in global demand caused a wave of business failures last year, prompting owners in cities such as Wenzhou in the southeast to flee.

The shockwave is now hitting the Chinese savers who put up money for those loans. Protests erupted in Anyang and other areas as lenders demanded officials get back their money.

“We have no other investment options and bank interest rates are too low,” said Zhang, who asked not to be identified further. Hopes of getting back the 270,000 yuan ($43,000) she lent are pinned on the courts so long as the government is willing to let a case proceed.

Rising defaults threaten to aggravate social tensions as the Communist Party tries to enforce calm ahead of a once-a-decade handover of power to a younger generation of leaders due late this year. The public already is fuming over inflation, corruption, product safety scandals and pollution.

Leaders including Premier Wen Jiabao, the top economic official, have repeatedly promised more credit for small companies. But most loans still go to state enterprises that have close ties with banks and form the power base of officials. Experts say there have been slight improvements but the situation hasn’t changed fundamentally.

“It always has been hard for small Chinese companies to borrow money from banks,” said Guo Tianyong, director of the Banking Research Center at Beijing’s Central University of Finance and Economics. He said the situation has worsened in the past year.

Entrepreneurs were struggling with slumping global demand when Beijing clamped down on a credit boom to cool its overheated economy. State banks cut the small amount of private sector lending they were doing while continuing support to state industry. Private companies failed and the survivors cut payrolls.

Only 19 percent of bank lending last year went to small businesses, while total loans fell 6 percent from 2010 to 7.5 trillion yuan ($1.2 trillion), according to the official Xinhua News Agency.