Serious Many PRC Tycoons Run Road Liao!

China's runaway bosses spotlight underground loan market

* Some small firms collapsing amid surge in underground lending rates

* Beijing has said collapses are not widespread

By Zhao Hongmei and Koh Gui Qing

BEIJING, Sept 29 (Reuters) - A string of Chinese entrepreneurs have gone into hiding to avoid repaying loans, according to state media reports, highlighting a credit squeeze on private firms and the dangers of steep interest rates in China's vast and growing informal lending market.

Many cash-strapped firms are unable to borrow from banks amid a credit clampdown by Beijing, and some have turned to China's underground lending market -- which pools money from individuals and firms -- at annual interest rates as high as 100 percent.

The staggering rates, at more than 15 times China's benchmark lending rates, have pushed some firms to the limit.

In just one day last week, Chinese media reported that nine bosses of small-sized firms in China's entrepreneurial capital of Wenzhou, in eastern Zhejiang province, had skipped town after realising they could not repay their corporate loans.

"The private lending craze has fuelled an economic bubble, and the 'runaway episode' in Wenzhou is a landmark event in the bursting of such a bubble," the official Financial News, a paper run by China's central bank, said in a report on Wednesday.

Among the bosses who have reportedly gone into hiding is the chairman of one of Wenzhou's prominent spectacles makers, Zhejiang Center Group Co. Ltd.

The well-known firm had harboured ambitions of a public stock listing, the China Business News said, but problems started in 2008 when it was squeezed by falling overseas orders, rising raw material costs and a firmer yuan.

Citing sources with knowledge of the matter, the newspaper said Zhejiang Center owes its suppliers between 50 and 100 million yuan ($7.8 million to $15.6 million). Calls by Reuters to the company's main number went unanswered.

"Seven days after his (the board chairman's) disappearance, a few company managers are still reporting for work," China Business News reported after a visit to Zhejiang Centre's Wenzhou office.

"But they are at a loss as to what they should do now."

Zhejiang Centre's website says it employs around 3,000 workers and has annual export sales of 500-600 million yuan.

Chinese officials have said repeatedly that they have detected no large-scale collapses among small firms in the country and that they do not face extreme credit shortages.

That point was reiterated on Wednesday by Lu Zhongyuan, vice head of Development Research Centre, a cabinet think-tank.

"Difficulties that small companies face are not mainly caused by tight credit," Lu said. "The biggest problem faced by small firms is the rise in costs."

LUCRATIVE LENDING

For the wealthy in China, lending their savings to firms at annual rates starting at around 36 percent is more lucrative than putting their money in banks that give negative returns.

China's one-year deposit rate stands at 3.5 percent, under the central bank's 2011 inflation target of 4 percent and signficantly below actual inflation which recently has exceeded 6 percent.

A thriving underground lending market has bloomed amid savers' zeal to put their money to better use. The central bank estimated the market was worth 2.4 trillion yuan as of the end of March 2010, or 5.6 percent of China's total lending.

"Speculative private lending has increased this year and has deviated from actual credit needs of the economy," said Fu Bingtao, an analyst at Agricultural Bank of China.

Fu said the risks to China's economy, the world's second largest, could be contained since the rampant lending is outside of the banking system and such loans are generally not used to fund speculative bets.

However, in its annual survey of Chinese banks released this month, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through "debt triangles".

This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cash flow problems which in turn can affect others higher up the supply chain.

Banks are also not entirely insulated. Savers' reluctance to put their money in banks has sparked a "war for deposits".

To win deposits, banks are paying for depositors' holidays within the country or their children's education, and offering job opportunities to their relatives, the Financial News said.

Yet for cash-rich savers, times are sweet.

An investment consultant in Beijing, who only gave his surname Bai, told Reuters he remits his salary back to the northern Chinese province of Hebei each month for his mother to lend to businesses.

"The money that I lent at the start of the year had annual interest rates of 10 percent. Now rates have risen to 50 percent," he said. "My 100,000 yuan of savings has grown to nearly 150,000 yuan."

But firms cannot afford such sky-high rates, said Zhou Dewen, head of the association for small- and medium-seized entreprises in Wenzhou. Many earn profit margins of between 3-5 percent so loan defaults may spike if rates do not ease next year.

Even Bai is worried for his borrowers.

"My neighbours at home are lending at annual rates of 150 percent," he said. "Which industry can enjoy such high profit margins? It's not like they are trafficking drugs." ($1 = 6.394 Chinese Yuan) (Additional reporting by Shen Yan and Kevin Yao; Editing by Ken Wills & Kim Coghill)

How do I join one of these underground lending syndicates?50 percent interest rates shit.even with defaults.

entreprenuers are not tycoons.

tycoons don't have cash flows problems.

Please lah, this news is year 2011. What's wrong with TS?

Latest from SCMP:

China’s runaway bosses a symptom of economic woes

Wanted posters for fugitive debtors, not commercials, are the main images that flash up on a big electronic screen in downtown Yixing, in the heart of the faltering Chinese industrial powerhouse that is the Yangtze River Delta.

The posters, from the local courts, show the identity card numbers and pictures of dozens of people who have fled unpaid debts. Rewards ranging from 20,000 yuan (HK$23,000) to 330,000 yuan are offered to anyone reporting their whereabouts.

Companies at the low end of value chain are facing a big crisis

Hu Xingdou, Beijing Institute of Technology

But Hengsheng Square is the glitziest part of Yixing – with the most luxury stores, the brightest lights and the priciest office buildings – and few passers-by, their attention directed elsewhere, heed the wanted posters. They have little novelty value in any case, with the “runaway debtor” phenomenon now just part of daily life in the small city as economic growth slows.

In many ways, the square stands as a metaphor for the overall health of the Chinese economy. Under a prosperous surface, deep cracks have begun to emerge in its investment-led model, casting a shadow over the country’s economic growth prospects and even giving rise to doubts about the fundamental soundness of the world’s second-biggest economy.

A court notice on a big screen in Yixing’s Hengsheng Square offers rewards for information about fugitive debtors. Photo: Simon Song

“The economic dynamics are waning,” said Professor Hu Xingdou, an economist at Beijing Institute of Technology. “China’s economic growth in recent years was powered by massive money printing, which is dangerous and unsustainable.”

Like many places in China, Yixing, in the eastern province of Jiangsu and a 2½-hour drive from Shanghai, is struggling to cope with weakening demand, rising wages and widespread industrial overcapacity. Its gross domestic product growth rate – 7.2 per cent last year – has almost halved in the past decade, exposing financial strains and prompting painful consolidation.

China falls back on fiscal stimulus to revive growth in ailing northeast rust belt

Runaway bosses are just a symptom of its economic woes. Behind every wanted poster on the big screen, there’s the story of a bankrupt factory, a business that’s gone bust or an investment chain that’s collapsed.

“Companies at the low end of value chain are facing a big crisis as they are engaged in industries saddled with overcapacity and are discriminated against by lenders which favour their state-owned counterparts,” Hu said. “Whether private companies can survive the bitter transformation will be crucial to China’s economic prospects.”

Wu Qiang at the Yixing Jinshu Cement plant. Photo: Simon Song

At the same time, many Chinese entrepreneurs are trying to find a way out by investing in the future, shifting from state-owned partners to consumers, and turning away from property to projects inspired by the government’s internet plus strategy, which is designed to integrate mobile internet, big data and cloud computing for manufacturing.

When Wu Qiang spent 500 million yuan to take over a Yixing cement plant with annual output of 2.4 million tonnes in 2010, following his father into the cement industry, he thought he was buying into a money-printing machine. It was the heyday for the construction sector, when China was still rolling out a massive fiscal stimulus programme, and banks were pumping out money to finance roads, bridges, new residential blocks and factories.

Beijing launches 200b yuan venture capital fund to foster SOE reform and spur innovation

The demand for cement was unprecedented and in the three years after Wu made his investment, China used more cement than the US used in the entire 20th century.

Wu, 40, remembers the “waterway traffic jams” created by cargo boats as they queued at his factory’s riverside dock before ferrying bags of cement to construction sites. Nowadays the price of cement is only about half its 2010 peak and just two or three boats can be seen loading bags at the dock.

Bags of cement are loaded onto a boat at Yixing Jinshu Cement’s dock. Photo: Simon Song

But he’s determined to survive the downturn and, using money accumulated during the good times, has spent 16 million yuan on desulphurisation facilities this year to meet stricter environmental regulations. He’s betting his competitors won’t be able match him.

Such investment is badly needed in an economy losing steam quickly as capital spending from the private sector stagnates. Not many private investors today dare put down money for future business.

Private investment proving to be Chinese economy’s Achilles’ heel

According to China’s latest bank credit data, mainland companies repaid more loans to banks than they borrowed from them in July, resulting in a net fall in new corporate loans, and companies with cash are content to just sit on it.

Liang Hong, an analyst at China International Capital Corp, said the hoarding of cash was a reflection of the “uncertainty trap” faced by entrepreneurs as Beijing’s efforts to balance policy between structural reform and growth stabilisation blurred investment prospects and the market fretted about the possibility of abrupt monetary, fiscal or industry policy changes.

Qian Fei, the owner of Lingfei Forging. Photo: Simon Song

Qian Fei, the owner of Yixing axle maker Lingfei Forging, is one entrepreneur who has decided against embracing the uncertainties of investment in a new project. Instead, he plans to trim back his business after having his fingers burned by a poor investment decision made in 2013.

Trotting from one workshop to another in the 15 hectare plant, Qian, 35, stopped from time to time to discuss work details with workers on a hot summer day. He majored in chemical engineering, the family business, at university and is proud he was able to learn all about forging after deciding to invest 300 million yuan in the plant, which makes axles for use in wind, hydroelectric and thermal power plants and other machinery.

Cross shareholdings at China’s state-owned firms set to surge amid push for more SOE reforms

He said he invested in the plant because he regarded other investment options, such as lending money to local government agencies for infrastructure projects as “insane”.

When the plant opened, things were looking good as orders flowed in, but he was in deep trouble just a few months later.

Workers at Lingfei Forging in Yixing. Photo: Simon Song

“I found I had stepped into a nightmare – most of my buyers are state-owned enterprises (SOEs),” he said. “Asking them to pay for what they’ve bought just seems like a tough battle.”

It was even hard to get hold of the right telephone number to demand payment. “SOE bureaucracy is a big headache,” Qian said.

To make matters worse, the SOEs are also feeling the pinch, with most of those involved in power generation saddled with overcapacity problems.

Bond defaults set to rise among Chinese companies, says S&P Global Ratings

In the first seven months of this year, there were 38 instances of default by 18 bond issuers on the mainland, six of them SOEs. The defaults involved 24.8 billion yuan, more than double the total for the past two years combined. And while only a third of issuers in default this year were SOEs, they accounted for about two-thirds of the amount in default.

An unused merry-go-round in Golden Street, Yixing. Photo: Simon Song

“I’m not sure if my [state-owned] buyers have financial troubles,” Qian said. “It’s just hard to get a penny from them. Taking that as a lesson, I will shy away from any industry where buyers are SOEs.”

Fortunately, his other business, producing chemicals used in household products, is doing well in a niche market. “I will focus on this field and invest millions of yuan every year in research and development in the hope of launching new products some day,” he said.

The hidden cracks in China’s employment figures

While the gradual shift in the economy’s centre of gravity from state-owned businesses to consumer-oriented, innovative ones offers a solution to Qian, there seems no easy way out for 28-year-old Yixing property developer Shi Yunpeng, who took over his father’s company four years ago after earning an MBA at the University of Manchester, in Britain.

“I haven’t started any projects in the past three years after seeing the high vacancy rates for properties even in prime locations,” Shi said.

A deserted shopping mall on Golden Street, Yixing. Photo: Simon Song

He pointed out the few lights flickering along a shopping street named Golden Street early one weekday evening. No water was spurting from a fountain in the middle of the street and there were no children playing on a merry-go-round. Some shops were for rent, while others were for sale at 50 per cent to 70 per cent of the prices their owners paid just two years ago.

Companies and lenders pay the price of overexpansion in Jiangsu

“Demand has been overwhelmed by the massive city creation games,” Shi said. “I will stop the property business and look elsewhere.”

Some friends had suggested an online gardening service that would help clients grow small but expensive indoor plants, tapping into changing lifestyle trends among wealthy and middle-class Chinese.

“Serving a lucrative niche market is the direction of a consumption-led economy in the internet era,” Shi said. “I will give it serious consideration.”