For businesses in China that are not state-owned, borrowing options are limited to private money lenders who require a higher interest rate to delay consumption as opposed to banks that lend depositor money to state-owned firms very cheaply.
Labor and materials were once cheap in China, but wages have sky-rocketed since the late ’90s.
The Chinese government says price inflation slowed to 6.1 percent in September, but food prices are still rising at 13.4 percent and the all-important price of pork still costs more than 43 percent more than a year ago.
Small to medium business credit can fetch interest rates of 70 percent, according to The New York Times.
Now that business has slowed, shouldering heavy debt service has broken the back of many entrepreneurs who have decided suicide or seclusion are better options than broken kneecaps and dishonor.
In recent months, at least 90 business executives from [Wenzhou], a one-hour flight south of Shanghai, have disappeared because of mounting debts and impending bankruptcies, according to a local government report.
The private lending market is huge in China at $630 billion according to the Times, with some of the funds being first borrowed from state banks and then re-lent into the underground market.
But households with cash are eager to invest in these lending pools because the interest rate paid by banks is half the stated inflation rate. “According to one local survey, more than 90 percent of Wenzhou’s households have invested in such lending pools,” writes David Barboza.
This all sounds familiar to the recent real estate boom. Real estate developers needing funding often relied upon private money lenders like Scott Coles’ Mortgages Ltd. in Phoenix. Coles attracted nearly a billion dollars of private investor money to finance construction in the Valley of the Sun. The 10 percent interest Coles was paying seemed like easy money during the boom. However, when the market hit the ditch, there was no 10 percent return on principal or return of principal for that matter.
Coles took his own life, leaving behind investors to pick up the pieces. Mortgages Ltd. investor Barbara Porter was forced to sell her home to make ends meet. But she didn’t blame Coles.
I think the problem was greed. We’re all greedy. That’s why my money was there, because he paid 10 percent instead of 4 percent. I’m greedy, too, so I can’t say I’m a better person. Everybody in town got caught up in this stupid appraising and spending. Now everybody’s upside down.
Central bankers the world over make sure their friends get cheap money, while the small business owner risks life and limb for money at any rate. Meanwhile, with rates pressed by central banks to the ground, savers must take high-flying risks to keep up with inflation.
Going for 10 percent instead of 4 percent isn’t greed, just instinct.