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Worst of Wenzhou credit crunch over: UBS
By Lydia Chen |
October 11, 2011, Tuesday
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Online Edition
Online Edition
THE worst "panic and hysteria" around the informal lending fallout in China's eastern Wenzhou City might be over as the local government joins hands with central authorities, banks and local businesses to stabilize the situation, UBS AG said in a report today.
Reports have flooded the media in recent weeks that tight monetary policies along with slowing economic growth have bankrupted small and medium enterprises and spurred the growth of underground lending in Wenzhou.
Business and debt restructuring will likely occur in the next few months in Wenzhou, China's small business cradle, with the help of bank liquidity and government involvement, Wang Tao, head of China Economic Research at UBS, said in a report today.
But similar problems would likely surface in other regions, like Zhejiang, parts of Shanxi, Inner Mongolia, Fujian, and Guangdong, Wang cautioned.
Zhou Dewen, chairman of the Wenzhou SME Development Association, said more than 90 private entrepreneurs have gone into hiding in recent weeks to avoid paying high interest on their informal loans.
Wenzhou in Zhejiang Province accounts for less than 1 percent of the national gross domestic product and reportedly has more than 400,000 mostly small firms that rely heavily on the black market for financing.
A recent survey by the People's Bank of China showed that almost 90 percent of households and 60 percent of firms participate in the illegal lending market. Official estimates from the Wenzhou branch of PBC put the size of the black market at 20 percent of formal bank lending, or about 110 billion yuan, as of June, up from 80 billion a year ago.
"The size of informal lending is relatively small and the concerns about the direct impact on the formal banking sector and the economy are exaggerated," Wang Tao said. The "bigger risks are credit withdrawal in both the formal and informal lending market and contagion," she added.
Wenzhou's government has sent 25 working groups, one each to every bank in the city, to oversee the handling of the fallout in informal bank lending and related business failures.
Premier Wen Jiabao also visited Wenzhou during the National Day holiday along with the heads of the central bank, the banking regulatory commission and the Ministry of Finance.
Wen asked the relevant authorities to stabilize the situation within a month, and promised to increase formal bank lending, reduce tax burdens on the small businesses, and to "further study" Wenzhou's proposal to formalize the black market.
Reports have flooded the media in recent weeks that tight monetary policies along with slowing economic growth have bankrupted small and medium enterprises and spurred the growth of underground lending in Wenzhou.
Business and debt restructuring will likely occur in the next few months in Wenzhou, China's small business cradle, with the help of bank liquidity and government involvement, Wang Tao, head of China Economic Research at UBS, said in a report today.
But similar problems would likely surface in other regions, like Zhejiang, parts of Shanxi, Inner Mongolia, Fujian, and Guangdong, Wang cautioned.
Zhou Dewen, chairman of the Wenzhou SME Development Association, said more than 90 private entrepreneurs have gone into hiding in recent weeks to avoid paying high interest on their informal loans.
Wenzhou in Zhejiang Province accounts for less than 1 percent of the national gross domestic product and reportedly has more than 400,000 mostly small firms that rely heavily on the black market for financing.
A recent survey by the People's Bank of China showed that almost 90 percent of households and 60 percent of firms participate in the illegal lending market. Official estimates from the Wenzhou branch of PBC put the size of the black market at 20 percent of formal bank lending, or about 110 billion yuan, as of June, up from 80 billion a year ago.
"The size of informal lending is relatively small and the concerns about the direct impact on the formal banking sector and the economy are exaggerated," Wang Tao said. The "bigger risks are credit withdrawal in both the formal and informal lending market and contagion," she added.
Wenzhou's government has sent 25 working groups, one each to every bank in the city, to oversee the handling of the fallout in informal bank lending and related business failures.
Premier Wen Jiabao also visited Wenzhou during the National Day holiday along with the heads of the central bank, the banking regulatory commission and the Ministry of Finance.
Wen asked the relevant authorities to stabilize the situation within a month, and promised to increase formal bank lending, reduce tax burdens on the small businesses, and to "further study" Wenzhou's proposal to formalize the black market.
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