Plunge in coal prices disrupts private lending chain in China’s Shaanxi’s Shenmu

Plunge in coal prices disrupts private lending chain in Shenmu

Staff Reporter

2013-08-25

Due to a plunge in coal prices last year, Shenmu county in northwestern China’s Shaanxi province — a bastion of the coal industry which was the main source behind the county’s GDP of 100 billion yuan (US$16.3 billion) — has been plagued by a private-debt crisis as many debtors have fled from the municipality. The crisis has disrupted the private funding chain in the county, seriously threatening the operation of many private enterprises and the continuation of ongoing projects.Many local residents have been forced to live at subsistence levels as the ongoing financial crisis has wiped out the majority of their savings, which they used for private lending like so many others due to the lure of high interest rates. Some debtors have already fled, while some use liquor or cars to repay their debts.

The financial crisis has dealt a major blow to the local economy since the majority of private enterprises there, numbering several thousands, have relied heavily on private lending. Many people are also suffering after funneling their idle funds into private enterprises rather than deposit their money in a bank. A resident said that half of the families in Shenmu are engaged in private lending, which could typically generate 3%-5% in interest every month.

Gao Haixiung, deputy chief of the development and reform bureau of Shenmu county, said that the vast majority of local enterprises borrow funds from the private sector, amounting to over half of their total financial needs in some cases. In Shenmu county, except banks, there are licensed small-loan lending companies, guarantee institutions, investment companies, and multitude of private lenders, which some say amount to several thousands in number.

Around 60% of private loans are used in coal mining, with the remainder in realty and other lines, according to a local residents. In addition to Shenmu, large amount of private funds have also been channeled to Ordos, which is also a major coal-mining town.

An insider estimates the scale of the local private-lending market at over 20 billion yuan (US$3.3 billion), while a judicial official from Ordos in northern China’s Inner Mongolia autonomous region, which borders Shaanxi province, said that some 60-70 billion yuan (US$9.8 billion- US$11.4 billion) of private funds have entered Ordos from Shenmu.

At present, cases of private lending disputes handled by local authorities involve funds in excess of 7.5 billion yuan (US$1.2 billion), including 4,786 cases involving 3.2 billion yuan (US$523 million) which have been submitted to the local court so far this year.