Bad loans trigger new debt crisis in China’s Wenzhou
July 30, 2013 Leave a comment
Bad loans trigger new debt crisis in Wenzhou
Staff Reporter
2013-07-30
The city government in Wenzhou in eastern China’s Zhejiang province has seen its finances deteriorate and is facing an economic crisis due to local businesses taking on bad loans, reports Beijing’s Economic Observer. The private lending crisis in Wenzhou, which erased a sizable amount of local residents’ savings, has begun to impact the official financial system, with banks reporting a surge in bad loan ratios, the paper said. The non-performing loan ratio at local banks climbed from 0.37% in June 2011 to a high of 4.01% in March, while 6,458 loan disputes, involving 24.2 billion yuan (US$9.3 billion) were reported last year.Local banks previously encouraged companies to be loan guarantors for each other, worsening the situation as the loans — mainly short-term borrowings — put strain on their operations even when the economic outlook was healthy.
To repay the loans, many companies have begun to cut production, the Economic Observer said, while banks have become less willing to offer credit to companies because of their depreciating assets, the value of which has dropped 30%-40% from the peak level.
According to the city government figures, the bad loan ratio dropped to 3.68% at the end of June, but it only reflected the effectiveness of banks to deal with the problem rather than show an improvement in how local businesses operate.
While part of the private lending crisis was created by the sudden decline of small businesses, the risks Wenzhou faces now comes from prominent companies, who are grappling to repay their loans. With the Wenzhou government’s finances already strained, the possible collapse of local industries owing to a tight credit environment may soon impact the city’s economy and its recovery may take over five years, the paper said.
Wenzhou authorities must increase their efforts to transform local industries as the city can still avert a economic crisis, shown by the healthy growth reported by local credit cooperatives, the Economic Observer said.
About bambooinnovator
Bamboo Innovator 