Private lending default fells another Zhejiang entrepreneur
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E-mail Xinhua, February 21, 2012
PONZI SCHEME
Paying high interest for years led to Liren's downfall, said Zhang Hongguo, Taishun's Party chief.
Auditors said the company had paid 3 to 3.5 billion yuan in interest over the past 10 years.
When Liren's real businesses could no longer pay back creditors, the whole thing turned into a Ponzi scheme -- the company started offering even higher interest to draw more money and then use investors' money to pay returns to earlier creditors.
Tempted by high returns, people took bank loans and some even mortgaged their homes to invest in Liren.
Many of Liren's creditors are civil servants and some even work for the judicial departments, which may explain why those government organs turned a blind eye to the extensive fundraising earlier.
Some creditors had learned about Liren's alarming situation but still wanted to gamble.
"Many knew that the profit was not enough to pay off the interest with an annual interest rate up to 60 percent. But who would have thought that this ended so quickly," said a creditor who demanded anonymity.
CONCERNS
Dong's fall from grace again raises concerns over the risks in private financing, which is booming in China, especially in Zhejiang where private businesses have become a pillar of the prosperous local economy, accounting for about 70 percent of the region's gross domestic product and providing 90 percent of its jobs.
However, most private companies have problems getting bank loans as banks prefer state-owned enterprises.
"If Liren could get loans from banks, this never would have happened. Who wants to pay high interest," said Yan Hanrong, an entrepreneur in Taishun.
It has been over 30 years since China started implementing market economic policies, but the country's financial market is yet to be fully opened up.
Last year, a government survey found that more than half of the 2,835 investigated companies in Zhejiang have sought financial help from private creditors. About 9 percent of the companies said they use high-interest private loans "all the time."
During last year's credit crunch, about 100 managers or leaders of private companies in Wenzhou were reported to have disappeared, committed suicide or declared bankruptcy -- invalidating debts of about 10 billion yuan by the end of October.
Prof. Fu Yunsheng with the research institute of economics under the Zhejiang Academy of Social Sciences suggests that private financing should be brought under unified regulation, a standardized information disclosure system should be established for the capital sources, investment and operation of private fundraisers and that efforts should be made to improve risk awareness for individual investors.
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