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 china
Private Banking,
Chinese-Style
Underground loans are flourishing, despite Beijing’s
efforts to rein in lending and cool the economy
Beijing wants to
curb investment
in overheated
sectors such as
real estate
By Dexter Roberts and Chi-Chu Tschang
Beijing Organic Farm Development
is booming. The fruit and vegetable
producer expects its sales to double
this year, to $7 million, and is plan-
ning a $1.3 million expansion. So will
Organic Farm head to the bank for a
loan? No way. With Beijing cracking
down on credit and banks reluctant to
lend to small fry, Chief Executive Chen
Conghong will instead do what she
has since founding the company seven
years ago: reinvest profits and turn to
family and friends if she needs more.
“We pour all of our revenues back into
the company,” Chen says.
And so it goes in Beijing’s efforts
to cool down its economy to avoid a
painful crash. Although the govern-
ap photo/eye press
ment in recent weeks has urged banks
to curb lending, there’s so much money
sloshing around China that companies
in need of funding can almost always
find it—no matter what the banks
are instructed to do. In fact, China is
brimming with informal networks that
companies can tap for funds. Hundreds
of semi-legal operations are more
than happy to make loans, and trade
associations often become temporary
lenders for their members. These loans
today total some $267 billion, or 28%
of the amount banks lend, estimates Li
Jianjun, a professor at Beijing’s Central
University of Finance & Economics.
“The government has controlled the
legitimate system, but that has just
made the illegitimate part of the loan
market more active,” Li says.
That’s not to say that the govern-
ment isn’t trying to slow lending. The
central bank this year has raised the
benchmark interest rate five times, to
7.29%, and hiked reserve requirements
for banks nine times. Other measures
are aimed at limiting investment in
overheated sectors, such as real estate,
and in polluting, inefficient industries
DECE M B E R 10, 2007 I BUSINESSWEEK

072 Department
like cement and steel. Despite all that,
the economy is expected to grow by
11.5% in 2007, the fifth straight year of
double-digit expansion.
China simply has too much capital
for such measures to work. Domestic
savings now stand at more than $5
trillion, and the country’s global trade
surplus hit $213 billion for the first 10
months. So despite the efforts to curb
loan growth, official lending jumped by
16%, to $467 billion, through October,
investment bank JPMorgan reports.
internet middleman
China’s high-flying companies, mean-
while, have plenty of cash. Through
August, pretax profits were up by an
average of 37% at mainland enter-
prises, the National Bureau of Statis-
tics reports. And Chinese outfits have
raised more than $50 billion in public
offerings this year both at home and on
international markets. “There’s a lot of
internally generated cash that allows
people to forgo borrowing,” says Paul
Schulte, an equity strategist at Lehman
Brothers in Hong Kong.
Those who need a loan don’t have to
stop at the bank. Yunnan Tianyin Real
Estate Development, for instance, has
plowed $1.3 million into apartment
buildings in Yunnan province and is
now seeking $4 million for additional
developments. The company turned
to China Private Capital Website, a
Hangzhou-based outfit that matches
potential investors with companies
that can’t get bank loans. “The crack-
down on bank lending makes more
real estate businesses look for loans
outside the banks,” says Meng Yang,
marketing chief at the three-year-old
Internet operation.
These underground sources aren’t
cheap. Interest can be as much as eight
times the rate charged by banks. But
the money is available fast. Getting
approval for a bank loan takes any-
where from six months to a year. The
informal networks, by contrast, can
often deliver the cash within 24 hours.
For most small companies in China,
“interest is not an issue,” says Ye Wei-
jia, director of New Venture China, a
nonprofit that helps small companies
secure funding. “If they need a loan, it
is for something urgent.” ^
BUSINESSWEEK I DECE M B E R 10, 2007
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