Posted on 10/15/2011 10:21:46 AM PDT by Kaslin
On September 29, with thanks Google Translate and some links in Chinese sent by a reader, I reported China Loan Shark Market Crashes; Scores of Chinese Business Owners Unable to Pay Black Market Loans Commit Suicide or Disappear
That story has now gone mainstream. the New York Times reports As China’s Economy Cools, Loan Sharks Come Knocking
Tight Credit SillinessThe 300 employees of Aomi Fluid Equipment here were delighted recently when the owner offered an all-expenses-paid, two-day trip to a mountain resort three hours away.
The owner, Sun Fucai — or Boss Sun, as he’s known — was so insistent that his workers attend that he imposed a $30 fine on any employee who refused the getaway. Nearly everyone went.
Except Boss Sun.
When the employees returned from their holiday, they found that the factory had been stripped of its equipment and that Boss Sun had fled town. “It was entirely empty,” Li Heying, a former Aomi worker, said of the factory. “It was like what happens in war time.”
The boss, as it turned out, was millions of dollars in debt to loan sharks — underground lenders of the sort that many private businesses in China routinely use because the government-run banks typically lend only to big state-run corporations.
In recent months, at least 90 business executives from this coastal city, a one-hour flight south of Shanghai, have disappeared because of mounting debts and impending bankruptcies, according to a local government report.
Whether out of fear of mafia-style loan enforcers — kidnappings and broken kneecaps are common tactics — or the family dishonor that is its own harsh penalty in China, some of the Wenzhou missing have gone into hiding. Others have fled overseas.
And in the last few weeks, at least three have attempted suicide by jumping off high-rises in the city, according to the state-run news agency, Xinhua, which reported that two of them died and the other survived with a broken leg.
“This is not just happening in Wenzhou,” said Chang Chun, who teaches at the Shanghai Advanced Institute of Finance. “Some companies borrow from the state banks and then lend into the underground market. Many are doing this type of arbitrage.”
“This informal lending was aggravated by the credit tightening that made borrowing from the official banking system more difficult,” said Wang Tao, a UBS economist based in Hong Kong.
"As I have repeated numerous times, those looking for massive inflation can find it in China, not the United States. Demand for credit is so insane in China, that businesses will go to any length to get it.Clearly this did not end well for "Boss Sun" or those who leaped from buildings, were kidnapped, or simply vanished as noted in the first link above.
"Courtesy of Michael Pettis at China Financial Markets, please check out the insane way some companies in China obtain credit. Via Email, Pettis writes ..."Interestingly, Pettis insists that credit cannot really be considered tight in China, rather demand for credit has gone through the roof.China had been importing for many months far more copper than was needed for real use – and this in spite of a huge surge in domestic infrastructure and real estate development which has boosted the demand for copper. Imports continued even when London prices exceeded Shanghai prices by more than the equivalent of China’s value-added tax.
Instead of being shipped to end users, it seems that copper was being stockpiled in warehouses. Why? One possibility of course was pure speculation. If you think domestic Chinese copper use is going to soar, and with it prices too, then it might make sense to buy copper and hoard it. But there seemed to be a lot more hoarding than normal, and anyway with London prices often above the tax-adjusted Shanghai prices, why would anyone want to speculate on foreign copper when it could be bought more cheaply domestically?
It turns out, that the copper purchases were not entirely, or even mainly, speculative. They were part of a financing scheme for companies that, in spite of the avalanche of new lending occurring both within and outside normal RMB lending, were having trouble accessing bank credit.
In my model, rapidly expanding credit is a sign of a huge inflation problem. For comparison purposes, many forms of credit are still stagnant or declining in the US.
This is supposed to end well? For who?
Ruh Roh
gravity finally ketches up with slow leaking balloon of helium.
Just the banksters running the small specs out of commodities.
Every central bank in the world is spewing fiat like diarrhea and it’s going to go up in value?
Not for long... just generating a buying op for banksters.
When they have enough they abruptly stop buying until their inventory get low enough, which can many months or even years. Since they are secretive, suppliers never know if their goods are being consumed steadily or hoarded which makes it really hard to forecast demand.
This boom and bust cycle makes planning a sporting proposition and when customer are in a stockpiling mood , demand goes up, supply gets low and prices go up.
When they stop, demand goes to zero and prices plunge as the supplier gets stuck with a lot of unsold inventory.
It's Chinese thing. Unfortunately, China's economy is now big enough that this boom and bust style can seriously impact the world's supply and demand
Everyone is afraid that 2011 is looking like 2008, but the biggest difference is that China can no longer take up the slack in the world economy. The three biggest trade zones, Europe the US and China, are all slowing down again.
Not sure about silver, but gold should do okay and oil with the problems in the ME.
historically, there is usually a 2-3 year time lag from when real estate peaks, to when the economy crashes.
So, the guys like Jim Chanos who are short china now will be right eventually, but they may have to wait.
I'm not going to make investment advice, but I'd be real careful about commodities, including gold and silver, right now. We are on the edge of Greece and several banks collapsing. In such an event, many financial institutions around the world will have to pay off derivatives, and those derivatives are denomiated in dollars and euros. They will sell what they have to raise dollars and euros, including gold. One thing sovereign states have is gold, and when they go bankrupt, that will change hands too.
Cheers!
You must not be talking about Cupertino because the Chinese already own it. LOL.
Good advice! We're in uncharted territory and have good supply of the essentials on hand...
Not sure about that. The Chinese goverment has a lot of capital control regulations that prevent the money from just going where the investor wants(which is what we are starting to do). Thats why there was a huge housing bubble. 64 or more million empty apt units, whole cites with no one in them, etc.
I worked in Nortel’s Optical Network’s division in 2000. The boom in optical networks was intense and forecasts showed no end to the geometric growth. Credit was plentiful and Lucent would finance 125% of your needs. As demand got superheated, the suppliers put all the customers on allocation, ie, “we can only fulfill part of your order” and we aren’t sure when you’ll get the rest. That drove customers to greatly increase their order size to try to assure themselves they would get what they actually needed. The whole house of cards began to come tumbling down in August 2000 when we got the first hints of massive shortfalls of new sales and cancellations. All of our forecasts weren’t worth the paper they were written on and all the optical equipment manufacturers got stuck with huge unsold inventory and factory utilization rates plummeted. The rest is history.
So, it’s not just a “Chinese thing.”
Copper may be dipping short term, but Copper is a critical metal for modern devices. If the average Chinese person purchased electrical appliances ... this would create a mega surge in demand.
Thanks Kaslin.
This is why residential real estate in ‘greater Cascadia’ and Australia’s urban centers have not seen a real correction since the credit crunch, hot money flows from ‘emerging’ Chinese businessmen planning escape routes for themselves and their children.
The Professor Pettis article you linked to was a seminal “Aha” moment for me to understand the commodities bubble last year.
In the end though, the vast real estate and infrastructure development in coastal China WILL be utilized, though it might be “owned” by a different clique of China’s elites. Once this financial crash occurs, the marginal labor supply will increase rapidly again, driving down wages and increasing the supply of labor, and the cycle will start anew.
Thanks for the explanation.
This is the next great world power.
Thinking about copper, the amount of copper held in China is enough for about 30 million cars and 30 million houses. Which is less than 2 years of car production and I’m not really sure on housing starts.
The weak hands inside China will get shaken out, the real physical copper assets will be centralized in the hands of power and production, and the ability for the remaining Chinese manufacturers to undercut foreign competitors due to lower commodity input costs will prove beneficial once this business cycle reaches it’s trough.
Its not like this copper is going to slowly melt away into a green patina slag heap in some abandoned warehouse.
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