国内英语新闻:China's cash-strapped small firms ring alarm bells

To curb soaring inflation, the People's Bank of China (PBOC), the country's central bank, has raised banks' reserve requirement ratio six times this year and hiked interest rates three times in a bid to check excessive lending.

China's benchmark interest rate of one-year deposits currently stands at 3.5 percent and banks have to set aside 21 percent of their deposits as reserves, mopping up about 2.1 trillion yuan (235 U.S. dollars) of liquidity otherwise available for lending.

The tightening monetary policies have bitten into China's small businesses which create 80 percent of the nation's jobs and generate 60 percent of the industrial output, but have difficulty securing bank loans.

Outstanding loans to small firms grew 26.6 percent year-on-year to hit 9.85 trillion yuan (1.55 trillion U.S. dollars) at the end of July, rising faster than the total outstanding loans of Chinese banks, said Xiao Yuanqi, an official from the China Banking Regulatory Commission (CBRC), late last month.

"But it (the statistics) does not touch upon the huge gap between actual bank loans and SMEs' financing needs or whether the banking sector has narrowed that gap," China Daily commented in an editorial.

The informal lending market between companies and individuals, which operates outside the banking industry, became a last resort for many private entrepreneurs facing a cash squeeze.

UNDERGROUND LOAN MARKET

The gap between small firms' financing needs and the credit crunch bloomed Wenzhou's informal lending market.

Currently, there are 186 guarantee firms, 1,088 investment companies, 431 consignment stores and 48 pawnshops in the city, data from local government departments showed.

Outstanding high-yield loans issued in the informal lending market currently totaled 110 billion yuan in Wenzhou, according to data from the PBOC's Wenzhou branch.

And the informal loan rates are staggering. According to the PBOC's Wenzhou branch, the composite annual interest rate in the city's informal lending market hit a record 25.09 percent by the end of August, compared with the banking sector's benchmark one-year lending rate of 6.56 percent.

The high rate drove the local residents in Wenzhou to lend on the informal market rather than to banks.

The PBOC estimated the market was worth 2.4 trillion yuan as of the end of March 2010, or 5.6 percent of China's total lending.

Lian Ping, chief economist with the Bank of Communications, told Xinhua it is easy for those dealing with the informal lending market to fall into a vicious circle by taking on new debts to repay old ones, considering the system's similarity to a Ponzi scheme.

"If there is no new funding to support such expectations, the system will collapse and creditors will suffer huge losses," Lian said.