Interest Rates Back Over 100% In China As Another Boom Town Goes Bust

We saw interest rates go above 100% during Wenzhou's cash crunch. Now another city in China has seen the same, plus mass protests.
Easy Credit Dries Up, Choking Growth in China
As some borrowers began defaulting early this year, worried lenders in the informal sector raised interest rates for small and medium-size businesses, previously 25 to 40 percent a year, to as much as 125 percent a year. The increase set off a much broader wave of defaults in recent weeks, as owners found themselves unable to repay billions of dollars in bad debts, many of them handwritten and hard to enforce in court.
Another ghost city bites the dust. This is a bit like the Wild West boom towns in America, except that in the U.S. there was some economic activity, such as a gold rush or timber industry, that created a boom town. In China, there is no economic activity that leads to a boom town, the boom town is an artificial construction by central planners.

Liu Linfei, a government official from nearby Yulin, stood on a Shenmu street corner in a T-shirt and shorts on a recent weekend afternoon, outside two high-rise hotels where construction had been stopped just before the windows could be installed. He said he had borrowed 600,000 renminbi, almost $100,000, from a bank shortly before the collapse, at an interest rate of 4.1 percent a year.

Mr. Liu then lent the cash to moneylenders here at an interest rate of 10.4 percent, planning to pocket the difference.

The moneylenders who borrowed from Mr. Liu defaulted, and now he is struggling to repay the bank. “I’m not going to lose my house, because I’m repaying it little by little with money I borrow from my relatives,” he said.
Same story, different place.

This paragraph gets to the heart of the matter:
Private sector businesses could afford to borrow at double-digit interest rates because nominal growth of 16 to 23 percent a year from 2004 through 2011 exceeded the rates. But nominal growth slowed last year to 9.8 percent and fell again in the first half of this year, to an annual pace of 8.8 percent.
You will always hear people say that China will still grow at 4 or 5%t, and that's still great compared to the rest of the world. The issue though is the debt. Chinese companies came to expect double digit rising nominal GDP growth. In other words, it was an inflationary boom, and as soon as the inflation slows, not stop mind you, but simply slows, the system comes collapsing down upon itself. Once borrowers start defaulting and credit slows, the system swings into reverse and the bust spreads across the whole economy.

Here is a Chinese language report from July:

Here is a translation from the YouTube page of the contents:
Shaanxi Shenmu More than 10,000 people on a continuous two days surrounded by the local county government, anti- corruption meeting county party secretary, led the local economy has crumbled, secretary was promoted transferred. But authorities sent one thousand police violence repression, at least a dozen people were arrested, and Internet-related net posts are deleted. Had rushed to the scene of protests, Mr. fold Shenmu residents told the "Tang Dynasty", and the surrounding streets in front of Shenmu government is anti- people and the police proposed packed. Shenmu residents, Mr. fold: "More than 10,000 people now have it! Yesterday, a day when the highest reaches two, thirty thousand, police were maybe a few hundred! I go over there and have martial law, the blockade, the people would go through now Each intersection is the police are . " people said they surrounded the county government, mainly for promotion of the county party secretary Ray coming due west. Fold President: "do not let the county go, that now you a go down this mess, so who pays?" people accused Ray due west during his tenure, not only has no achievements, the economy has plummeted, leading to hundreds of thousands of people affected. Shenmu resident Ms. Wang: "The economic downturn is no one to appreciate it. Anyway, this thing affects people's life." fold Sir: "There are a lot of supermarkets, shopping malls, have closed down, why Shenmu now a lot of houses, high-rise buildings are now built to a semi stopped, because it is now no money, and another one, a lot of small loans or pawn shops closed down, it put that money one put out erupted after the money back. " Finance pointed out that since late last year, Shenmu outbreak of severe credit crunch folk, the Chinese authorities not only failed to take measures to prevent, but rather let local officials will finance 60 billion squandered until the liabilities 30,000,000,000. Order by the people ultimately bitter.

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