(Ecns.cn) -- Two local business owners in Wenzhou committed suicide on September 26, failing to pay off their usurious debts, according to the Economic Information Daily.
Since April this year, owners of over 80 local bankrupted civil companies have closed their firms and hid from the public, which has led to tides of employee strikes. In the single month of September, 25 such cases occurred.
In Wenzhou's Longwan District alone, of the 10-billion-yuan in capital involved with these small and mid-sized entities, only 30% were loaned from banks, and the rest came from civil loaners in what is known as usurious loans.
The Wenzhou model, paralleling that of the Shanghai and Guangdong models as the three pillar economic patterns during the early development of China's market economy, comes from family-based businesses starting from a small production scale, low technical levels, and low transportation costs.
Originating from the city of Wenzhou in East China's Zhejiang Province, this business model expanded its market all over the country and has extended its interest chains overseas.
However, as business grows, it is inevitable to deal with financing issues. The Wenzhou model, initiating from civil earth almost without governmental intervention, is coming to a critical phase.
Whether it will be able to establish a healthy financial credit system to regulate the grey zone of civil usury, which is no longer a local phenomenon but has been be seen in Jiangsu, Fujian, Henan and Inner Mongolia, has triggered worries about a potential Chinese credit crisis.
The city government has founded a special team on civil financing and economic transformation engaging 14 city departments, including the Discipline Inspection Commission, the People's Court, the Bureau of Labor and Social Security, the Office on Finance, and the Banking Regulatory Commission.
Wild expansion of civil loan market
A recent report by the Central Bank indicated that last year when the civil loan market was first initiated, the capital reserve of this market exceeded 2.4 trillion yuan, about 5% of the entire loan market at that time. This figure has hiked by more than four times to 28%.
A CCTV news program called "News 1+1" carried out a survey on the civil loan crisis in Wenzhou and found that about 89% of the families and 60% of the companies in the city are involved.
The latest statistics show a civil loan total of around 100 billion yuan, according to Deputy Director Zhou Qingmin of the city's Banking Regulatory Commission.
Half of the lenders' funds are borrowed from banks. "Usually we mortgage our properties at the banks and borrow at a monthly rate of 2%. The rates will more than double when we lend to companies. Another approach is to absorb capital from business owners and circulate it to another hunter for funds," admitted many private loaners on how they make a snow-balling effect of their resources.
With potential annual interest rates higher than 60% and in some cases even up to 180%, no other explanation is necessary for the wild growth of civil usury.
As astonishing as the comparison between the 5% gross interest rate and 100% annual usury interest rate, what on earth motivated the city to take such drastic actions?
