Credit crisis highlights transition urgency

XI'AN -- A credit crisis in Shenmu, a bustling northwest China county that built its riches on coal, has stoked concerns regarding how quickly the country can complete its economic transition.

Hundreds of underground banks that mushroomed in Shenmu during more prosperous times have failed to collect large amount of debts, as prices of coal and real estate have fallen sharply.

Lured by annual earnings of 20 percent, more than 20 billion yuan ($3.3 billion) in private funds is believed to have swarmed into local underground banks, which previously lent to investors at annual rates of more than 30 percent, according to a local resident surnamed Meng.

The borrowers could invest the funds in coal mines or real estate for higher profits, Meng said.

Underground lending also boomed due to the fact that small and medium-sized companies were unable to get loans from traditional financial institutions, as well as the limited investment options provided for private capital, said Huang Zhen, a professor with the Central University of Finance and Economics.

The capital chain was sustainable when coal prices were at high levels, but the situation changed when a slowing economy drove coal prices down.

The price of thermal coal, which is used to fire power plants, has declined 10.7 percent from the beginning of the year, according to the benchmark Bohai Rim steam-coal price index issued for the week ending on Tuesday.

The investment frenzy triggered significant coal production expansion. However, waning demand has caused 88 of the country's 99 mines to suspend production, said Gao Haixiong, deputy director of the county development and reform bureau.