China Loan Shark Market Crashes; Scores of Chinese Business Owners Unable to Pay Black Market Loans Commit Suicide or Disappear

Here is an interesting email from reader "Kevin" regarding the crashing loan-shark market in China.

Hello Mish

I am a long time reader and want to bring to your attention on a new development in China: private business owners are disappearing or jumping off buildings because they can no longer pay off black market shark loans.

According to national new paper Economics Information (part of state media Xinhua), on 9/22, Hu Fulin, owner of the biggest eyeglass manufacture of the city of Wenzhou disappeared, leaving behind 2 billion RMB debt.

On 9/25, 3 more business owners in Wenzhou disappeared (owners of copper, steel and shoe manufacture).

On 9/27, owner of "Zhengdeli", a shoe manufacture jumped off of a 22 story building and killed himself.

Since April this year 29 private business owners have disappeared, all of them had over 100 million RMB businesses. 11 of the 29 owned shoe manufacturing businesses.

An analyst from China Investment (China's Sovereign investment fund) pointed out that it's because they are squeezed by a rapid increase of component and labor costs. A rising RMB is also a reason why many export oriented companies are hit. In August, Zhou Dewen, President of Wenzhou Small-Medium Business Development Association said the profit margin of Small-Medium businesses in Wenzhou has dropped to under 5% and absent of policy changes, 40% of businesses in Wenzhou will go out of business by next Spring Festival (late Jan 2012)

The complete article is here (in Chinese): http://www.jjckb.cn/2011-09/29/content_334954.htm.

Another article http://finance.sina.com.cn/roll/20110929/005910558780.shtml (titled: China's Shark Loans Crashing; "Grey Finance" Brewing the Chinese Crisis) states that most of those owners have borrowed "private" loans (typically 70% of all loans), with MONTHLY interest rate ranging from 3% to 10%.

About 89% of families/individuals and 59% of companies in Wenzhou participated in such "private loan" schemes. In Erdos (the ghost city you blogged many times), such "private loans" are more than 200 billion RMB with annual interest rate over 60%. Now they are crashing, causing rampant unfinished real estate projects in Erdos.

Note that Wenzhou is one of riches cities in China (No. 3 in disposable income per capita), and is considered the "Birthplace of China's Private Economy". Wenzhou people are among the first that got in trades, manufacturing, export, and in recent years real estate investment/speculation. The Wenzhou economy is considered the "weathercock" of Chinese economy.

Loan Shark Credit Crisis Brewing

Courtesy of Google Translate please consider Gray Chinese-style financial credit crisis brewing area

"Economic Information Daily" correspondent from the multi-confirmed the day before and then there were two causes of Wenzhou City, inability to repay loan sharks and jumping events. According to informed sources, the two business owners are the local shoe factory owner, debt of millions.

Since April this year, Wenzhou, missing more than 80 business owners, the company closed, the event staff pay talks, since September alone, there are up to 25 cases. A local lender told reporters, "At present, only the flight of capital Longwan area estimated to have 100 million or more, many SMEs liabilities, the banks accounted for 30%, accounting for 70% civil usury."

Crazy expansion of private lending market chaos

Some sharks can reach up to 180% per annum. ... "many companies debt snowball, private lending market has not been given attention now has about 25% local to 30% of companies in trouble, some in the suspension or semi-shutdown state, but by the end of this class companies are more likely accounted for 40% to 50%. "

Financial Earthquake Triggered by Loan Shark Business

Also courtesy of Google Translate, please consider loan-sharking business owners who jumped to escape

September 22, Wenzhou, Zhejiang Jiang Xintai largest optical company chairman Hu Fulin liabilities 2 billion fled, triggering a major earthquake Wenzhou business. Wenzhou Zhou German SME Development Association president, said Hu Fulin liabilities involving nearly ten thousand people, dozens of companies, including upstream and downstream Nobuyasu and creditors, the incident is still fermenting, the impact will be further expanded.

Hu Fulin fled after the September 25 Wenzhou enterprises have three big boss fled; afternoon of September 27, Wenzhou shoe boss is profit because of debt problems from Wenzhou Shun Building, 22 Floor, Jin jumped to death.

The translations are choppy, but the ideas very easy to spot.

$SSEC - Shanghai Exchange -Daily Chart



click on chart for sharper image

China is down another 1% (not reflected in the above chart), to 2368 as of 2:00 AM Thursday. It closed at 2365.



click on chart for sharper image

The Shanghai stock market depicts a credit bubble that collapsed in 2008, partially rebounded, and is sinking once again.

China did not decouple from the global economy, nor is there any reason to believe it will, or should. China's debt bubble, housing bubble, and copper Ponzi financing schemes are collapsing.

Copper Ponzi Scheme: See Ponzi Financing Involving Copper Trade Gone Wild In China for details of a copper financing scheme now gone bust.

Shark Loans: See Ponzi "Shark Loans" Fuel China's Housing Bubble; Home Sales Plunge 44% in Xiamen; Bubble Busts in Tianjin for details on how loan shark operations fueled China's real estate bubble.

Ghost Cities: I have done many stories on China's ghost cities, most recently World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

Property Loans Halted: Property Loans Halted in China's 2nd and 3rd-Tier Cities; Is China's Spectacular Real Estate Bubble About to Pop?

All of these schemes are starting to unravel in a major way.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Enron-i-sation of Europe; Is the Euro "Beyond Rescue"?

Steen Steen Jakobsen, chief economist for Saxo bank in Denmark discusses the Enron-i-sation of Europe in an Email "Macro Brief"

The Enron-i-sation of Europe: Finding solutions through SPV’s speak for themselves. Apart from the inability to being implemented (if German constitutional court is heard) it’s also a slippery road towards permanent aid. Hiding debt in more and more obscure vehicles is similar to Enron having 1000s of SPV hiding the “real issue”. Debt is debt. It needs to be paid back or someone needs to take a loss!

New financial tax: This is major game changer – this is in my opinion the beginning of the end for Europe – the “new new” in this scenario is that G-20/EU seems to have found an academic documentation that the tax may not need be applied “universally” – they mention domestic taxes in India(not freely trading market) and UK.

The suggested (not confirmed) level of taxes are 0.1 pc on shares and bonds (1 mio. EUR equals “tax” of 1.000 EUR) and 0.01 on derivatives or 1.4 pips on each side of EURUSD! This is MASSIVE tax……. And as such shows that my Maximum Intervention concept is now operating a top speed.

Banks are now meeting around Europe to move their operation outside the EU.

We are no longer doing two steps forward, three steps back, but one step forward and ten back. Furthermore the so called “Plan” for saving Europe is not reality.

All my sources confirm, again and again, this is a desperate attempt to find the right path through this mess. The people in the know, realize there are no longer any good solutions only pain. The pain from here is either 2-5 years of recession or 10-15 years. Enron-i-sation & tax makes this week the new low in solidarity, rationality and solution seeking.

Cash is king – and cash in UK, Switzerland, Singapore, and US even more King-ish. I remain EXTREMELY bearish on this.

Notes on SPVs

Investopedia describes the Special Purpose Vehicle/Entity - SPV/SPE

What Does Special Purpose Vehicle/Entity - SPV/SPE Mean?

1. Also referred to as a "bankruptcy-remote entity" whose operations are limited to the acquisition and financing of specific assets. The SPV is usually a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.

2. A subsidiary corporation designed to serve as a counterparty for swaps and other credit sensitive derivative instruments. Also called a "derivatives product company."

Thanks to Enron, SPVs/SPEs are household words.

Euro is "Practically Dead, Beyond Rescue"

Bloomberg reports Euro Is Beyond Rescue in Debt Crisis, Szalay-Berzeviczy Says

The euro is “practically dead” and Europe faces a financial earthquake from a Greek default, according to Attila Szalay-Berzeviczy, global head of securities services at Italy’s biggest lender UniCredit SpA. (UCG)

“The euro is beyond rescue,” Szalay-Berzeviczy said in an opinion piece for index.hu., a Hungarian news portal, which he signed as former chairman of the Budapest Stock Exchange. “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”

“It’s one scenario among many, one which may lead to the breakup of the euro area via a banking crisis,” he said in the interview. “This can still be averted. It primarily depends on the Germans, and secondly on European citizens, especially on how much the Greek population can tolerate.”

Szalay-Berzeviczy’s “are his own personal view and do not reflect the position of the company,” Claudia Bresgen, a spokeswoman at UniCredit in Munich, Germany, said by e-mail.

"Beyond Rescue" and "This can still be averted" are logical opposites.

Nonetheless, it's interesting to see such blunt comments from high places at major lenders, even if those comments "do not reflect the position of the company".

For more on the twisted mess in Europe, please consider these recent posts

• Growing Isolation in Germany as Merkel's Allies Abandon Her; Polls Show 75% of Germans Oppose More Bailouts; Clock Ran Out of Time


• Merkel Prepares Market for Bigger Haircuts; Split opens Over Greek Bail-Out Terms; Needs vs. Fantasies


• Europe Plans to Tax Stock and Bond Transactions .1%, Derivatives .01% Despite US Objections; Expect More Crashes Should it Pass


• European Stocks Climb Most in 16 Months; Pimco's El-Erian Says "Europe Finally Gets It"; El-Erian is Wrong in Multiple Ways


• Germany's Top Judge Throws Major Monkey Wrench Into Leveraged EFSF Machinery, Demands New Constitution and Popular Referendum for Further Powers

I struggle to see how the Eurozone can survive intact. No currency union without a fiscal union has ever survived and the German court ruled out a fiscal union without a new constitution and popular referendum. Good luck with that given 75% of Germans oppose more bailouts. See the above articles for details.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Growing Isolation in Germany as Merkel's Allies Abandon Her; Polls Show 75% of Germans Oppose More Bailouts; Clock Ran Out of Time

German Chancellor Angela Merkel will likely survive a key vote on Thursday to expand the EFSF bailout fund, but passage now depends on support from the opposition.

Even more telling is the increasing isolation sentiment in Germany. Polls show shows three-quarters of Germans are against the expanded European rescue fund that's subject to Thursday's vote. So, who is it that politicians represent?

The Wall Street Journal reports Germans Reconsider Ties to Europe

When German lawmakers vote Thursday on whether to put more money into Europe's bailout fund—a step many investors see as essential to prevent a market panic—several conservative deputies, including Wolfgang Bosbach, a prominent champion of European integration, are expected to vote "no." Mr. Bosbach, a high-ranking conservative in Ms. Merkel's Christian Democratic Union, has recently become an outspoken critic of the bailout strategy.

"The first medicine didn't work, and now we are simply doubling the dose," said the lanky Mr. Bosbach of the Greek debt crisis. "My fear is that when the big bang happens, it won't just be us who will have to pay but generations hereafter."

The lawmaker rebellion underscores a broader shift among Germans about their nation's role in Europe since the crisis erupted nearly two years ago. While the Thursday vote is expected to pass, and a vast majority of Germans continue to feel a strong, historical commitment to Europe, with a common currency as its anchor, many have grown doubtful of whether it's worth the ever-growing cost of saving the euro.

A poll for national German broadcaster ZDF earlier this month shows three-quarters of Germans are against the expanded European rescue fund that's subject to Thursday's vote.

The measures before German parliament today would nearly double the main euro-zone's bailout fund's lending capacity to €440 billion ($595 billion) and allow the fund to buy sovereign bonds in the open market.

Germany's contribution to the new, expanded rescue loan package is €211 billion, still less than half the €500 billion it pledged to bail out its banks in 2008. But many see the European Central Bank's moves to buy billions of euros in low-grade government bonds of southern European countries as another sign that European institutions are slipping away from them.

Even more unpalatable is the prospect of making the euro zone collectively liable for its members' debts, as a growing chorus of European officials have recently urged. Many argue so-called euro bonds, which Ms. Merkel has steadfastly opposed, are the bulwark to relieve financial pressure on debt-ridden members and underpin the euro zone's full fiscal union.

But to Germans, it would mean relinquishing their hard-won low borrowing rates to pay for the largess of more free-wheeling members.

"Ultimately the euro-bond issue will come to a head, and Ms. Merkel will have an impossible dilemma," says one senior German coalition lawmaker. "If she goes back to the German people with [euro bonds], she is out. If she doesn't, she will be a very lonely person in Europe."

Merkel's Clock Ran Out of Time

The vote in Germany is a foregone conclusion, but it is the end of the line for Merkel, whether or not she needs opposition votes for passage.

She is taking a stance 75% of the nation does not agree with, and that stance is guaranteed not to work. The German court nixed Eurobonds, permanent bailout funds, and leveraged use of the EFSF.

Greece is going to need more and there is no more to give. Time will not improve this situation but it's a moot point. The clock ran out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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