By Zhang Yaodong (张耀东)
Nation, page 9
Issue No.566
April 23, 2012
Translated by Tang Xiangyang
Original article: [Chinese]

 
Wang Li, a forty-year-old middle school teacher, is part of a group of private lenders.

“This is how we have been brought up…I don’t go asking for favors when I need money. I just go to the group meeting and offer to pay a higher interest rate than the other applicants,” said Wang, who is from Xiapou County in Fujian province.

These so-called private lending auctions are common in small coastal towns, where people who need money will attend meetings of prospective lenders and outbid one another for their funds.

The head of the group collects money from all the members regularly, creating a fund from which loans are made to other members and occasionally to their friends and acquaintances.

In essence, it’s the reverse of the procedure that governments use to borrow money from the market - whereas the U.S. treasury holds a Dutch auction where banks and brokerages indicate the lowest interest rates at which they’ll lend, in Fujian, it’s the lenders who give their cash to whoever offers to pay the highest interest.          

In the most recent gathering, Wang and her friends lent tens of thousands of yuan to a man who wants to start his own business in another town.

 
In Sansha Town (三沙镇), where Wang lives, people prefer to borrow from the group rather than the banks, which are considered inefficient and strict.

 
Wang Li said the group helps a lot in solving financial problems, including payments for weddings, funerals and children’s school fees. As long as the borrowers repay the loans in good time,

 
If you’re a member of the group, there’s even an upside to missing out on a loan attempt – since you make regular contributions to the fund, you get an equivalent slice of the interest payments, so you get a share of the higher interest rates that someone else was prepared to pay.

 
The people in charge of the lending group have priority access to the pool of funds, and this has made some of them very rich.

 
Wang Li’s monthly salary is 3,000 yuan and she earns an extra 2,000 yuan from tutoring. Each month, she spends 2,000 yuan and channels the remaining 3,000 yuan into her group’s lending fund, which she says “is the safest and best” option.

“If I borrow 5,000 yuan from one person, they’ll charge monthly interest of 200 yuan, but if I borrow from the group, I only have to pay 130 yuan a month, which includes principal, and I’ll have repaid it all within three to four years.”

 
One official from the Xiapu County, who wouldn’t give his name, said that private loan auctions are “part of the local way of life.”

 
Wang Li was born in Sansha, and spends all her time there, although her husband and daughter live elsewhere.

 
“I am comfortable here. I know everybody. Some are my old friends since childhood,” she said, adding that this is one reason why she is willing to lend to people there.

 
Since there is no big firm in the town, the residents also think that the risk of a financial crisis is smaller, and Wang thinks that the lending groups could cope with a few creditors absconding.

 
The Fujian Academy of Social Science has linked the province’s private lending groups to the vibrant local private economy and says that they grew up alongside the Reform and Opening-up policies that were introduced in 1978.

 
In the rural eastern part of Fujian, private lending groups meet at the beginning of school term, when parents are getting cash together to pay teachers fees.

 
Private lending group are particularly common in the Ningde and Quanzhou cities, where some have thousands of members each contributing tens of thousands of yuan. In some cases, people can borrow millions of yuan in just ten minutes.

 
To most locals, the lending groups are far more attractive than banks.

 
“You take out a loan of three million yuan from the bank. But you only get one million once you account for all the fees. Who would go to a bank?” said an unnamed electrician in Fuan Town.

 
There is a danger that these private lending groups can operate as “Ponzi Scheme” unless there is proper regulation.

 
Past problems
China had a severe power shortage in 2003 and people saw huge potential for the town like Fuan to cash in on the need for power station machinery. Groups of private lenders saw a chance to get great returns.

 
In 2004 the head of the largest lending group, Chen Lixun was imprisoned. She had collected more than 300 million yuan, and in 2006, another group chief, Li Zhu, turned himself in after collecting 2.5 billion yuan.

 
These scandals killed off lots of local lending groups in Fuan. Most families in the , town of 650,000 were affected, and there were many violent attacks.

 
That wasn’t the first time that Fuan’s private lending groups ran into trouble – back in   1992, they almost collapsed and it took the government four years to clear up the mess.

 
“My family was also affected. We lost more than 20, 000 yuan,” recalled Xiao Jian, a local public servant.

 
He was new to the government then, and found that people were going every day to meetings of private lending groups. Even his wife was sucked in by the appeal of high returns.

 
Xiao Jian had a sense that a collapse was coming.

 
“I saw lots of people making money at the very beginning. Sometimes you would make 500 yuan from an investment of 1,000 yuan,” he said.

 
“I won’t be the last one,” he said to himself. He paid 1,000 yuan every day for 28 days and then the head of his team ran away.

 
As the groups collapsed, the government had to clear up the mess.