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.

About bambooinnovator
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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