2015-03-17

Single Rumor In Loudi, Hunan Sets Off ¥10 Billion Bank Run

On the heels of the report of private fundraising collapsing across Henan province comes reports of private fundraising collapses in Hunan last year. This year the authorities are left trying to deal with the aftermath and any potential knock-on effects. As was the case in Handan and Henan, the story involves real estate.

The problems began in 2014 when firms stopped paying interest on their high-interest loans. On the even of Spring Festival this year, all over the city there were cases of people threatening to jump off buildings or drink poison if they weren't repaid their investment. According to city officials, of more than ¥40 billion in private lending (illegal fundraising), ¥11.8 billion has problems, with 73 companies involved.

Companies ran into hard times and used high interest loans to pay back old debt, eventually leading to a bank run situation and a wave of bankruptcies.

One 70 year-old laid-off worker said he invested ¥50,000 at 2% monthly interest and can't get his money back. A 47 year-old married couple, both laborers, lent their ¥700,000 in compensation for a government land taking to a company offering 2.5% monthly interest. Now they live in a shack, unable to build a home. A civil servant has been raising funds from friends and family since 2005 to invest at high interest, eventually borrowing more than ¥10,000,000. Now he spends his days avoiding his creditors.

Their stories don't compare to Wen Chaoxia's, a janitor who invested ¥170,000 with two companies. Unable to get her money back in April of last year, and unable to tell her husband, she quickly lost 10 pounds. By October, she was at wits end and threw herself into the river.

One firm she lent to was Kowloon Group. Ma Ming remembers investing with them before Spring Festival in 2013. Investors were snaked into the corridor outside of the 100 square meter office of Kowloon Group, looking to invest at 1.8% monthly interest. He was there with ¥300,000 cash at 11 am, but had to wait until 4 pm before being served.

Other firms were offering 2% to 4% interest due to the competition. At many firms, the production and sales departments were not the most active, but the lending department. In order to take advantage of a booming market in lending, many firms had started lending platforms. One employee of such a firm said his boss told all the workers to bring in loans and offered them a 1% commission.

Things started going off the rails in late 2013. The boss of a small rice company named Xiao jumped off a building. This alone would have done little to shake the market, but Xiao's last name was the same as the Kowloon Group boss' name. Rumors spread that the firm had run out of money and the Kowloon Group's Xiao was the one who committed suicide. The rumor quickly turned into a bank run that ripped through Loudi's private lending market. Even the banks were being hit as lenders (the public) called in their loans en masse.

According to the head of Loudi's Finance Office, 90% of companies in the city may be involved in one way or another. Of the borrowed capital, only 30% was used for production, with the other 70% consumed by high interest rates as borrowers sought new loans to repay old ones.

One boss in Loudi estimates that most firms has profit margins of about 10%, but monthly interest was 2%, leaving no room for profit. At 3%, there was no way firms could repay loans. Many bosses understood this problem and were merely investing for themselves at high interest rates too.

Today, at Loudi City Economic and Technological Development Zone you can barely hear machines. The firms have nearly all shuttered and weeds are overtaking the area. This is a national investment project, designed for more than 80 companies with output values above ¥10 million. Already 10 of these firms have succumbed to the credit crunch.

At least one firm was shell company suspected of illegal fundraising. The boss purchased Hummers, Mercedes and other luxury cars, and spared no expense to buy calligraphy and paintings. This type of firm is a small part of the story. The bigger story are all the firms that piled into real estate.

Three years earlier, the high profits of the real estate industry were able to sustain high interest lending. Loudi is a major mining area with coal, iron ore and antimony mines. Many fortunes were made, but when coal prices fell in 2011, money started pouring into real estate. Profits were initially as high as 50%, but by 2013, the market was saturated and profits were harder to come by, eventually leading to the cash crunch.

The Loudi Municipal Finance Office director dealing with the lending crisis points to his gray hair. Thus far, 8 companies have received government assistance and resumed operations, 25 are being liquidated and 10 are being investigated by the police. The government believes that by saving businesses and cracking down on the criminals, the situation can be handled. Kowloon Group has received loans of more than ¥200 million from the government. The firm has used some money to begin paying interest, with the rest going towards operations.

iFeng: 湖南娄底全民放贷 一老板自杀引爆百亿借贷挤兑潮

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