As far back as 2008, China began putting “credit controls” in place to try to control burgeoning real estate development and prevent the formation of a housing bubble. To this end, Chinese banks are now limited or even prevented entirely from extending housing- and development-related credit, making it more difficult to get conventional financing for property development[1]. While this has made bank lending far more complicated, it has also fueled a fast rise in importance and profitability of private lenders, who are offering “crucial cash lifelines” to companies of all sizes and types throughout the country[2].

As with private lenders in the United States, private lenders in China can offer cash within a day (versus three months or more on a conventional bank loan) to borrowers who meet their standards and, in exchange, charge interest above official bank rates. However, this is a very “gray” market in China, where business transactions of all types are strictly regulated, and there is little firm information or data about this type of lending. One report estimates that private loans “stood at about 2.4 trillion yuan ($365 billion) at the end of March 2010.” This would equate to about 5.6 percent of the nation’s total lending, and all indications are that the volume has only risen since then.

Analysts say that the high volume of private loans being made in china highlights “deep flaws in the Chinese financial system” – in large part, tight government control of banks and a tendency to issue loans only to “preferred” customers who tend to be large, state-owned companies rather than private enterprise. Lawmakers presently do not appear particularly interested in full legalization of the private lending sector, and although these lenders are generally not prosecuted, there are reports of “disputes and lawsuits involving smaller lenders and pawn shops,” which also run a thriving lending practice based largely on car and property title loans.

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[1] http://news.xinhuanet.com/english/2008-08/28/content_9728847.htm

[2] http://economictimes.indiatimes.com/news/international-business/private-lending-thrives-under-china-credit-clampdown/articleshow/7725755.cms