Wu Guangqiang

    jw368@163.com

    DISPUTES and crises derived in the form of private financing are chronic woes in China, and a recent debt crisis has stoked fresh fears of economic disorder and social unrest as a result of massive default in the private lending market.

    The crisis broke out in Loudi, a small city in Hunan Province. Since the end of 2013, there have been numerous mass gatherings of creditors outside companies that owe them money. They have demanded payment of interest and principals.

    According to the city’s finance office, the total capital in the city’s private lending market had reached a whopping 40 billion yuan (US$6.4 billion) by the end of 2014. Seventy-eight local enterprises and many individual debtors borrowed money from thousands of lenders, mostly salary earners. Some of them were even pensioners.

    Yet thousands of creditors lost their investments when the borrowers went bankrupt. The total insolvency sum is estimated at 18 billion yuan, according to an online report.

    Several businessmen in the area have reportedly committed suicide and more have disappeared. The credit disaster has left many creditors in dire conditions. Excited by debtors’ promises to ensure high returns to their loans, they put their life savings into what has turned out to be a Ponzi scheme.

    A 70-year-old laid-off worker with hemiparesis loaned 50,000 yuan — all his life savings — to a local company at an interest rate of 2 percent per month. A 47-year-old man and his wife, both casual laborers at construction sites, lent 700,000 yuan, the compensation payment for their expropriated land, to a firm at a 2.5 percent monthly interest rate. Yang Hua, a civil servant, raised over 10 million yuan among his relatives and friends and lent the money to businesses.

    Now all these people’s dreams of getting rich have evaporated as their debtors are trapped in financial trouble.

    Such a crisis is nothing new. The city of Wenzhou in Zhejiang Province experienced the booming of its private lending market and the default crisis in 2011.

    Dubbed the nation’s capital of private financing, at peak times, Wenzhou saw 89 percent of its households and 60 percent of its firms involved in private financing, with total capital estimated at 110 billion yuan.

    Historically, Wenzhou’s economic growth has been largely dependent on a private financial network, which interweaves lenders and borrowers collectively, often to their mutual benefit and sometimes to their terrible loss.

    In July 2011, after a well-known entrepreneur named Wang Xiaodong disappeared, a serious domino effect of financial trouble started to shatter the entire system. More than 90 owners of private companies were reported to have disappeared, committed suicide or declared bankruptcy — invalidating debts of about 10 billion yuan owed to banks and individual creditors pooled from the private lending market.

    Debt disputes led to numerous lawsuits, some of which were controversial. Wu Ying, an entrepreneur from the city of Dongyang in Zhejiang Province, was convicted of financial fraud and initially sentenced to death, but the sentence was overturned by the Supreme Court of China. Her sentence was reduced to death with a two-year reprieve in 2012.

    Wu’s sympathizers contested that she merely borrowed the money from her friends and invested them in profitable businesses while the prosecutors charged her first with illegal fund-raising and later with financial fraud, a crime punishable by death.

    In fact, there have been some grey areas in terms of legitimacy of private lending and some local authorities have neglected their duties of overseeing and regulating the market to control risks.

    Private lending is an important supplement to the banking system and in the best cases it will not only help provide financial aid to small and medium enterprises, but offer private capital a proper channel to invest as well.

    China legalized private lending in Wenzhou in 2014 by allowing the city to serve as a testbed for liberalizing private lending. In November 2013, Zhejiang’s provincial legislature passed a law that allows enterprises in need of funds to receive private loans via private capital management firms, financing information service firms and lending service institutions.

    Before necessary legislation is in place, private lending activity must be strictly overseen. Unapproved private financing must be banned and local authorities must answer for the consequences of illegal money-raising programs.

    (The author is an English tutor and a freelance writer.)