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Bad loans trigger new debt crisis in China’s Wenzhou

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.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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