China's trapped entrepreneurs fuel pawnbroking boom
(Reuter)
Updated: 2006-02-27 10:28

Late last year Zheng Jianhua pushed open the gilded doors of a pawn shop in Beijing and got what her bank had refused: a $125,000 loan to tide her textile company over a cash crunch.

Two women walk past a pawn shop in Shanghai. The pawn shop has gradually become a burgeoning financing channel among urban residents struck in a cash crunch. [newsphoto]

The pawn shop quickly agreed to the 1 million yuan loan, secured against property, which helped the privately owned Dong Fang Hua Na Garment Co. to pay its debts and stay afloat.

"I was very happy that day because we didn't expect they'd be able to approve the loan in just a few days," said Zheng, an accountant at the firm, which employs just over 100 workers.

"Getting bank loans is extremely complicated and difficult," she grumbled. "And some of them just turn you down flat if you want to borrow less a million yuan."

Once reviled as a tool of capitalist exploitation, pawn shops have sprung up across China since the government lifted a 40-year ban on them in the late 1980s.

They are thriving by meeting the demand from small firms and individuals for short-term loans that China's banks, with their focus on lending to big state-owned firms, traditionally ignore.

"Many small firms look to pawn shops for funding as they still face obstacles in getting bank loans," said He Qiang, an economist at the Central University of Finance and Economics.

Although banks have been able to charge as much as they like for loans since October 2004, many still view private firms as too risky a proposition since they do not have state backing.

Xie Bin, head of the financial research institute at the Development Research Centre think-tank, said the boom in pawn shops spoke volumes about the failure of China's banks to price risk properly and provide decent services to small businesses.

"Small firms borrow from pawn shops only when they have no way out, because they must pay very high interest," said Xie, whose centre reports to the State Council, China's cabinet.

Pawn shops in Beijing typically charge 3.2 percent per month on loans secured by property and 4.7 percent per month on other loans. The benchmark bank lending rate is 5.58 percent per year.

They are an expensive source of money, but they can decide on few-questions-asked loans in just two to three days, compared with two-three months at banks.

UNDERGROUND LENDING

China's leaders are likely to renew their support for the private sector, the main source of growth and jobs, when the National People's Congress, or parliament, convenes from March 5.

Fast-growing small and medium-sized firms accounted for 75 percent of jobs in China and nearly 60 percent of gross domestic product, according to Di Na, a senior official at the National Development and Reform Commission, the main planning agency.

But many private firms are feeling the pinch of credit curbs in place since 2003 to cool parts of the economy, forcing them to turn not just to pawn brokers but to unauthorised lenders.

The market is huge. A central bank survey has estimated annual underground lending at 950 billion yuan ($118 billion), or 7 percent of GDP and 6 percent of all lending in China.

Informal lending, which encompasses borrowing from friends and business contacts as well as loan-sharking, is extensive in bustling hubs of private enterprise like Wenzhou, near Shanghai.

It is also common in the countryside. The Organisation for Economic Co-operation and Development estimates that informal channels accounted for as much as 70 percent of rural credit.

Uneasy at so much unsupervised lending, China has chosen five provinces to experiment with private rural credit companies.

The first batch, set up recently in northern Shanxi province, is allowed to charge interest up to four times the official benchmark lending rate, the Economic Daily reported on December 28.

THRIVING PAWN SHOPS

Regarded as mankind's oldest financial institution, pawn shops can be traced back at least 2,000 years in China.

China now has more than 1,000 pawn shops, including nearly 500 approved last year alone. But compared with pawnbrokers in developed countries, such as Cash America International Inc., the industry in China is still in its infancy.

"Pawn shops complement banks because they provide a reliable source of funding for cash-starved small companies -- the reason why they can prosper," said Yang Yong, chairman of Huaxia Pawnshop Co. Ltd., which operates in downtown Beijing.

Huaxia lent 300 million yuan in 2005, 70 percent of it to small firms, and made a profit of 3 million yuan.

Many Chinese redeem their pawned valuables once they can make ends meet, but over the Chinese new year a growing number of Beijingers pawned their unwanted gifts and chose not to buy them back, Xinhua news agency reported this month.

This has the authorities concerned that the shops could become a magnet for stolen or fake goods.

"In an effort to prevent pawnshops becoming a channel for the disposal of illicit goods, all the city's pawnshops have been placed under the supervision of the police authorities," Xinhua said.