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Credit crisis begins to cripple Chinese cities - Economic Times
As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China.
Top luxury clothing stores in this city's downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city's business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions.
But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted.
Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city's car dealerships have failed. The owner of the city's largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars' worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.
"It's an economic crisis just like the United States has had; just like it," said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. "There's no cash, everyone stays home without a job, there's no way the economy can recover."
Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of broader troubles that are beginning to afflict the entire Chinese economy. Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets.
The cracks are showing in many sizable cities like coastal Wenzhou, where informal lending, a big part of so-called shadow banking, has dominated for a quarter-century. Cities with economies linked to commodities with falling prices have also been affected, as more people have defaulted on loans. The biggest, most economically diverse metropolitan areas like Beijing and Shanghai seem considerably less affected, but also have many small and medium-size businesses that depend on informal lending.
Lending has collapsed here in northern Shaanxi province, where it had been particularly speculative and frenzied, and where the local coal industry has also been crippled by steeply falling prices.
As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.
"Almost no one will give you a loan," said a construction executive who gave only his surname, Xie, as he stood next to his white Toyota Land Cruiser outside a project that had been halted.
As the Chinese economy boomed, few cities soared faster or higher than Shenmu, a community of nearly 500,000 in northwestern China.
Top luxury clothing stores in this city's downtown were recording as much as $500,000 a day in sales. Tables at the best restaurants had to be reserved weeks in advance. The new Fortune Garden Club for the city's business elite made headlines by paying $1 million for a king-size mahogany bed, to be used by members and their companions.
But a painful credit crisis is now spreading across Shenmu and cities nearby, as thousands of businesses have closed, fleets of BMWs and Audis have been repossessed and street protests have erupted.
Now the leading purveyors of Western fashions are deserted, monthly sales at restaurants are down as much as 97 percent and the marble entrance to the Fortune Garden Club is shuttered. All but one of the city's car dealerships have failed. The owner of the city's largest jewelry store was detained by the authorities a week ago after creditors found him secretly packing millions of dollars' worth of gold and jewels into cases and accused him of preparing to flee the city without settling his debts. A top restaurant closed a day earlier, and its owner left town, as have the founder of the Fortune Garden and many other executives.
"It's an economic crisis just like the United States has had; just like it," said Wang Ting, an operator of an illegal casino in Fugu, near Shenmu. "There's no cash, everyone stays home without a job, there's no way the economy can recover."
Shenmu, and nearby cities like Ordos and Fugu, are at the leading edge of broader troubles that are beginning to afflict the entire Chinese economy. Across China, growth has slowed. With the slowdown have come rising defaults on loans made outside the conventional banking system, chronic overcapacity in many industries like coal mining and steel production and, in particularly troubled cities like Shenmu, a sharp decline in previously debt-fueled prices for real estate and other assets.
The cracks are showing in many sizable cities like coastal Wenzhou, where informal lending, a big part of so-called shadow banking, has dominated for a quarter-century. Cities with economies linked to commodities with falling prices have also been affected, as more people have defaulted on loans. The biggest, most economically diverse metropolitan areas like Beijing and Shanghai seem considerably less affected, but also have many small and medium-size businesses that depend on informal lending.
Lending has collapsed here in northern Shaanxi province, where it had been particularly speculative and frenzied, and where the local coal industry has also been crippled by steeply falling prices.
As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.
"Almost no one will give you a loan," said a construction executive who gave only his surname, Xie, as he stood next to his white Toyota Land Cruiser outside a project that had been halted.
