钩针编织怎样收针视频:Personal financial risk can only be mitigated through monopoly breakups

魏一帆　更新于2011年07月13日

China’s problem at present is that financial monopolies and over-regulation have created abnormally high interest rates for private lending, in turn creating an enormous burden and risk for economic activity.  The vast majority of medium and small businesses bear the brunt of this as victims of usurious interest.

Personal financial risk can only be mitigated through monopoly breakups
By Li Tie (李铁)

Vice Premier Wang Qishan (王岐山) spoke at the Financial Services Forum for Medium and Small Businesses not long ago.  He emphasized that the state of private credit markets requires utmost attention.  He said a strategic and thorough perspective is needed to accelerate the transformation of financial industries; the promotion of structural adjustment, reform, and innovation; and the comprehensive rise of the quality of services and financial support for small businesses.  

Since the beginning of 2010, money markets, despite constant tightening, have given birth to a new round of explosion in private credit.  With a bank deposit reserve ratio at an all time high, the majority of credit capital is going to state owned enterprises (SOE’s), so financing has become more difficult for medium and small businesses.  They have had no choice but to rely more on private lending.  The imbalance between supply and demand has caused the interest rate for private lending to rise considerably.  According to monitoring data from The People’s Bank in Wenzhou, the private lending interest rate has reached above 25% overall and the trend continues to move upward.  This means that medium and small businesses in Wenzhou need to guarantee profits of at least 25% each year.  Otherwise they will be not be able to pay the interest and will have no recourse but to abscond. 

The steps Wenzhou has taken haven’t been easy given the larger picture of domestic retrenchment and an international economy in upheaval.  They have been forced to raise interest rates extremely high on private financing just to weather the storm, but loan defaults are on the rise due to an economic downturn, which increases the burden on small businesses.  This is a vicious cycle which can create a chain reaction that threatens regional finances, the economy at large, and even social stability. 

How can the risks related to usurious loans be reduced?  Should the China Banking Regulatory Commission just wipe them all out, so that there will be “peace for all” through a barren wasteland of private finance?  Unfortunately, the past decade or so of “wiping out” has proven that, regardless how draconian the laws are, private finance continues its robust growth.  The reason is simple.  China’s previous financial system lagged behind the economic reality.  In the real economy there was a vacuum which the financial system couldn’t account for.  And when there is a vacuum there is always someone who will try to fill it.  If the government can’t or won’t, then individuals or underground forces will naturally move in. 

Usurious loans in and of themselves are not criminal in a modern economy.  If it were in a free and open market, interest rates would be formed through competition.  This is a reflection of the relationship between supply and demand and no matter how high the rates, they will always be reasonable.  Funds can be allocated in the best way according to those prices.  China’s problem at present is that financial monopolies and over-regulation have created abnormally high interest rates for private lending, in turn creating an enormous burden and risk for economic activity.  This is the crux of the problem. 

Interest rates are the compensation for taking on risk.  Since private finance has had onerous regulation for a long time, various effective financial products have not been able to see the light of day.  This has had a direct effect on the inadequate supply of financial services.  Interest is then naturally high.  Also, due to legal restrictions, it has been impossible to establish various contractual safeguards for private lending.  Contractual and legal risks are high, so lending interest invariably rises.  Using the black market inevitably leads to high prices, which is a very simple thing to understand.

The vast majority of medium and small businesses bear the brunt of this as victims of usurious interest, which is created by a high degree of monopolistic and financial suppression.  Since they find it difficult to obtain loans from government institutions, they have no choice but to accept high interest products from private lenders.  Statistics show that even though the non-state sector accounts for over 70% of GDP, it has received less than 20% of formal bank loans in the past decade or so.  A study by the DRC’s Research Institute of Finance shows that almost all long term commercial loans are given to state backed projects.  Medium and small businesses usually get working capital loans of one year or less.  They essentially will not offer long term or fixed asset investment loans. 

Small privately owned businesses and large SOE’s are treated very differently when it comes to financing, which has lead to the emergence of a double track system.   This gives those who hold the power to distribute funds a lot of room for rent seeking.  During a 2009 conference on cracking down on profiteering, Wang Lijun (王立军) disclosed that the black market for loans in Chongqing had reached 30 billion yuan.  This is equal to one third of the city’s annual revenue.  A financial expert also revealed that much of this money comes from government systems.  These SOE’s and government organizations use favorable national policies to obtain very low interest loans, and then give high interest loans to small businesses or individuals who need them. 

In the Wu Ying case [吴英案: a woman who was sentenced to death for financial crimes], someone gave a detailed outline of high interest loan [scams] to media.  We can see through this outline that departments in the local government, the justice department, and public employees at banks were all implicated in offering bank loans to individuals or small businesses, and the money came from low interest loans originally given to local SOE’s.  This is an inevitable outcome of a financial monopoly.  In the entire chain of usurious loans, the financial bigwigs are the only segment which truly reap a reward. 

The room for rent seeking comes from privilege.  These privileges will only be eliminated when financial monopolies are broken and the onerous regulations on private finance are relaxed.  This will allow private finance to truly see the light of day and participate in fair competition.  And operating private finance in the open can also mitigate contractual and legal risks, which will significantly reduce interest rates.  This is the only feasible way to reduce the risk of personal finance.