MCLC: easy credit dries up

[Denton, Kirk]

MCLC LIST
From: kirk (denton.2 at osu.edu)
Subject: easy credit dries up
***********************************************************

Source: NYT (8/15/13):
http://www.nytimes.com/2013/08/16/business/global/easy-credit-dries-up-crip
pling-chinese-cities.html

Easy Credit Dries Up, Choking Growth in China
By KEITH BRADSHER

SHENMU, China — As the Chinese economy boomed, few cities soared faster or
higher than Shenmu, a community of nearly 500,000 in northwestern China.

Top luxury clothing stores in this city’s downtown were recording as much
as $500,000 a day in sales. Tables at the best restaurants had to be
reserved weeks in advance. The new Fortune Garden Club for the city’s
business elite made headlines by paying $1 million for a king-size
mahogany bed, to be used by members and their companions.

But a painful credit crisis is now spreading across Shenmu and cities
nearby, as thousands of businesses have closed, fleets of BMWs and Audis
have been repossessed and street protests have erupted.

Now the leading purveyors of Western fashions are deserted, monthly sales
at restaurants are down as much as 97 percent and the marble entrance to
the Fortune Garden Club is shuttered. All but one of the city’s car
dealerships have failed.

The owner of the city’s largest jewelry store was detained by the
authorities a week ago after creditors found him secretly packing millions
of dollars’ worth of gold and jewels into cases and accused him of
preparing to flee the city without settling his debts. A top restaurant
closed a day earlier, and its owner left town, as have the founder of the
Fortune Garden and many other executives.

“It’s an economic crisis just like the United States has had; just like
it,” said Wang Ting, an operator of an illegal casino in Fugu, near
Shenmu. “There’s no cash, everyone stays home without a job, there’s no
way the economy can recover.”

Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of
broader troubles that are beginning to afflict the entire Chinese economy.
Across China, growth has slowed. With the slowdown have come rising
defaults on loans made outside the conventional banking system, chronic
overcapacity in many industries like coal mining and steel production and,
in particularly troubled cities like Shenmu, a sharp decline in previously
debt-fueled prices for real estate and other assets.

The cracks are showing in many sizable cities like coastal Wenzhou, where
informal lending, a big part of so-called shadow banking, has dominated
for a quarter-century. Cities with economies linked to commodities with
falling prices have also been affected, as more people have defaulted on
loans. The biggest, most economically diverse metropolitan areas like
Beijing and Shanghai seem considerably less affected, but also have many
small and medium-size businesses that depend on informal lending.

Lending has collapsed here in northern Shaanxi Province, where it was
particularly speculative and frenzied, and where the local coal industry
has also been crippled by steeply falling prices.

As some borrowers began defaulting early this year, worried lenders in the
informal sector raised interest rates for small and medium-size
businesses, previously 25 to 40 percent a year, to as much as 125 percent
a year. The increase set off a much broader wave of defaults in recent
weeks, as owners found themselves unable to repay billions of dollars in
bad debts, many of them handwritten and hard to enforce in court.

“Almost no one will give you a loan,” said a construction executive who
gave only his surname, Xie, as he stood next to his white Toyota Land
Cruiser outside a project that had been halted.

Although changes are being slowly introduced, state-owned banks have long
been allowed to lend only at low, regulated rates barely above the
inflation rate, with the total value of loans controlled by quarterly
quotas. All over China, these loans go overwhelmingly to large state-owned
businesses, government officials and politically connected individuals,
who then relend the money at much higher interest rates to small and
medium-size businesses in the private sector that need money to grow.

Liu Linfei, a government official from nearby Yulin, stood on a Shenmu
street corner in a T-shirt and shorts on a recent weekend afternoon,
outside two high-rise hotels where construction had been stopped just
before the windows could be installed. He said he had borrowed 600,000
renminbi, almost $100,000, from a bank shortly before the collapse, at an
interest rate of 4.1 percent a year.

Mr. Liu then lent the cash to moneylenders here at an interest rate of
10.4 percent, planning to pocket the difference.

The moneylenders who borrowed from Mr. Liu defaulted, and now he is
struggling to repay the bank. “I’m not going to lose my house, because I’m
repaying it little by little with money I borrow from my relatives,” he
said.

The Chinese are finding it harder to repay loans because the economy is
slowing. Most analyses of China’s economy look only at the real economic
growth rate, around 7.5 percent this year. But for companies’ sales and
profits, which determine their ability to repay debts, what really matters
is the nominal growth rate, which is real economic growth plus inflation.

Private sector businesses could afford to borrow at double-digit interest
rates because nominal growth of 16 to 23 percent a year from 2004 through
2011 exceeded the rates. But nominal growth slowed last year to 9.8
percent and fell again in the first half of this year, to an annual pace
of 8.8 percent.

At the same time, overinvestment led to overcapacity. Dozens of new mines
opened around Shenmu in the last decade and older mines expanded. But
demand has grown much more slowly than expected for electricity and steel,
the two main users of coal.

Coal prices have dropped by half in the last three years as a result. Now,
out of 90 mines near Shenmu, practically the only ones still operating are
nine that are state-owned and do not need to show a profit.

The popping of the real estate bubble has been the most serious blow to
the local economy. Real estate prices had soared in cities across China.
In Shenmu, 1,200-square-foot apartments that sold for less than $20,000 a
decade ago reached $330,000 by last winter.

Local real estate brokers say that they are advising sellers to avoid
price cuts of more than 10 percent. But local business owners who buy and
sell apartments say that deals are now being done for as little as
$115,000 for a 1,200-square-foot apartment, a decline of 65 percent.

Public discontent is fueling street protests. Several thousand residents
turned out in mid-July for a demonstration in the expensively paved square
across the street from city hall, demanding that municipal officials
revive the stalled economy. More recently, a smaller group of migrant
workers protested, demanding that the local government pay their back
wages after construction was halted on a row of high-rise apartment
buildings.

Yet a Shenmu merchant, who insisted on anonymity because of local
tensions, said that he had a lot of sympathy for officials, who even put
up banners on city streets last year warning residents of the dangers of
participating in informal lending schemes.

“It’s a national problem, it’s not a local issue,” he said.

Patrick Zuo contributed research.