China may legalize private money lending

Beijing Times
November 17, 2008

Private money lenders are likely to be recognized by law in China.

Today’s Beijing Times reports that Liu Ping (刘萍), a vice director of the People’s Bank of China (PBC), said yesterday that a draft bill regarding the status of private lending has been submitted to the State Council for approval.

The new policy is intended to help small businesses, whose difficulties in obtaining credit from state-owned commercial banks have worsened thanks to the global financial crisis. The gap left by commercial banks is currently filled by pawnshops, for-profit guarantee providers, and unauthorized private money lenders, or “underground banks” (地下钱庄), which have lower lending standards and demand higher interest rates. Underground banks have been around for a while and have even prospered as an important alternative source of funding in some parts of the country.

In the article, Liu is quoted as saying that in China, “the credit market has been monopolized by banks. The new law will hopefully break their monopoly by allowing qualified lenders to make loans, making it easier for small businesses who seek fund.”

According to the draft bill, businesses or individuals can register to be a “private money lenders” on the condition that they do not take in deposit money; business owners must have clean records. A statutory maximum for loan interest is set to be no higher than four times of the base interest rate. According to an investigation conducted by the PBC, some underground banks impose interest rates of 200% to 300% on loans. Overall, the average interest rate of these loans is between 12% and 15%, compared to the current rate of 6.66% for commercial bank loans.

Also on the front page:

● Beijing plans to construct six new subway lines starting next year. It is estimated that the total length of Beijing subway will reach 561 kilometers by 2015; it currently stands at 209 kilometers.

● Three people were found dead in a room on the second floor of a two-story building in Fengtai District. It is suspected that they were killed by carbon monoxide generated by a boiler on the ground floor. The landlord was taken away by the police.

● Police raided a firework storehouse in Pinggu District and confiscated over 6,000 cartons of illegal fireworks (see the big photo on the front page).