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To: robnhood who wrote (7074)	9/28/1998 10:33:00 AM
From: Joseph G.	Read Replies (1) \| Respond to of 86076

<<BEIJING, Sept 28 (Reuters) - Real estate developer Wang Jiantao needs money in a hurry, but the banks are saying no. For a start, Wang is just 28 -- far too young to be taken seriously by China's stuffy state bankers. And his credentials as an entrepreneur do nothing to endear him either: Wang made his first fortune by running a pawn shop. "Trying to get loans from state banks is too much hassle," said Wang, general manager of Yilong Co, a company based in Lanzhou in China's far west. Like many other private businessmen in China, Wang will probably end up begging for funds on the currency kerb market. It will cost him dearly: annual interest rates on China's grey market run as high as 80 percent a year. But the cost to China of such borrowing is even greater. The hidden risks of a huge underground lending market is giving sleepless nights to Beijing leaders, well aware that lax financial controls brought down the economies of countries such as Thailand and South Korea. And the high cost of funds is throttling the growth of non-state enterprises that offer the best hope of employment to millions of laid-off state workers. CREDIT CRUNCH FOR PRIVATE BORROWERS China's illicit kerb market helps bankroll the most dynamic part of the economy. "Nearly all private and collective companies borrow on the underground market when they need money urgently," one central bank official said candidly. Collectives refer to enterprises with mixed government-private ownership. Together with private and foreign-funded firms, they account for two thirds of industrial output and employ 200 million people. Yet 70 percent of all loans by China's big four commercial banks are to state enterprises, which account for just a third of industrial production, employ 120 million people and mostly lose money. The result is that China's most worthy borrowers are being crowded out by some of the worst ones. "To support large and medium-size state enterprises is still the main task of major state commercial banks," said one banker in Lanzhou. "State banks basically still don't lend to non-state small companies," he said. By some accounts, as much as $250 billion worth of bank loans are non-performing, or one quarter of all outstanding loans. SKY-HIGH INTEREST RATES In the 1980s and early 1990s, when the state economy was awash in cheap credit, banks and state enterprises earned easy profits through back-door loans to private businesses. Hot money created speculative bubbles in the stock, futures and property markets, which were burst by an austerity programme launched in 1993. Loansharking is still a profitable game for state enterprises that retain a line of cheap bank credit. And the incentive for state banks to earn illicit profits is just as great, or even greater. Banks, under pressure to cut their bad loans and reduce risk, are having trouble finding creditworthy state customers. Their idle funds are now parked with the central bank, and they are only too keen to lend some of it to non-state companies at exorbitant interest rates. Chinese bankers say interest on one-year loans on the underground market generally starts at 20 percent and rises to 40 percent. Some desperate borrowers will pay rates of 80 percent. By contrast, interest rates on one-year loans by state banks are just 6.93 percent. Besides non-state firms, local governments are big borrowers on the kerb market, raising funds with unauthorised bond issues for pet projects, most of them property related, bank officials said. FEAR OF TURMOIL But while returns on the kerb market are high, so are the risks. In June, the central bank closed the once high-flying Venturetech Investment Corp, a Beijing-based company with gilt-edged political connections. A former Venturetech official said the company lost about 1.0 billion yuan ($120.5 million) from property investments in Hainan province that went sour after the 1993 national credit squeeze. Venturetech began to take in high-interest deposits and offer high-interest loans to repay the funds, leading in the end to a payments crisis, the official said. Also in June, Hainan Development Bank became the first Chinese bank since 1949 to be closed. Its woes stemmed in part from unregulated underground banking activities. The government fears such failures will whip up social turmoil. State media have reported numerous protests by furious investors in failed underground finance houses. THE BOOKS LOOK MESSY Most state banks have departments for lending to small companies, usually in the private sector. But the volume of business is tiny, partly because of inexperience among loan officers in credit analysis. "We have a department that exclusively handles loans for small and private firms, but the business remains small," said Wang Junhong, an official at Beijing-based CITIC Industrial Bank. "The accounts of most small firms look messy," he said. ($1.0=8.3 yuan) REUTERS >>