China's Latest Economic Red Flag: Loan Sharks... Who Devour You
Reports have begun to appear in China's state-run media of businessmen disappearing or committing suicide to avoid loan sharks. This suggests that the Great Unraveling is gaining speed.
The official Sinha news agency says a large number of companies in the city of Wenzhou have closed following the disappearance of more than 80 businessmen since April. This article followed a story in Economic Information detailing a number of those cases -- including one where a shoe factory owner committed suicide because he owed millions to loan sharks. (If Google's translation is to be trusted this story ran under the headline "Financial Earthquake Triggered by Loan Shark Business.") The paper also warned of similar problems in Zhejiang, Jiangsu, Fujian, Henan and Inner Mongolia.
For the official media to be reporting on this, things have to be pretty bad.
A large portion of China's banking is done through the so-called "gray financial system." This is because many Chinese do not trust the official banks and, presumably, because the official banks often won't lend money to single individuals or unconnected enterprises. Some of the gray market consists of family members loaning to each other and the like. Some of it consists of criminals who will not let you declare bankruptcy or walk away from a property because it's not worth what you owe on it.
The sun'll come out tomorrow... except when it doesn't
A lot of people who can't afford it have borrowed money on the gray market in hopes that the economy (or property values) would increase enough to let them pay the money back with a profit. (Sound familiar?) And a lot of people got lured into Ponzi schemes. (Mish Medlock has a great round-up of various criminal Chinese business activities.)
Just like here, that strategy worked until it didn't.
One indicator of the the condition of the real-estate market: Earlier this week Chinese property stocks suffered double-digit declines over fears that developers are losing access to funding and will be forced to slash prices. To make this even worse, China already has a severe over-supply of housing. PBS's Dateline quoted an analyst as saying there are around 64 million empty apartments in China.
The downturn in worldwide consumer demand is clearly taking its toll in China. Economic Information quotes the president of a development association as saying that if economic conditions do not improve by spring 40 percent of the enterprises in Wenzhou will have lay-offs or even bankruptcy.
China's lack of a reliable legal system has always been the economy's weak spot. Contracts are frequently enforced on the basis of influence, and government regulation is so bad that even congressional Republicans complain about it. A blogger for Economic Information warns that anytime you see something labeled "high growth," it's a speculation gimmick.
Now that weak spot looks like it may become the entire spot.
Sleep tight, y'all.
Related:
- The Cracks in China's Economy Are Already Beyond Repair
- China Is Indeed Home to Many Deceitful, Corrupt Companies. No, Really?
- SEC Wants to Take Out Chinese Business Records, but It'll Only Get Kung Pao'd
- China's Economy Is So Bad Even the Rating Agencies Are Telling the Truth
- Can China Actually Deflate Its Real-Estate Bubble?
- More Red Flags of Warning Flying Over China's Economy