01/05/2006, 00.00
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China, 800b yuan a year in underground loans

Underground banking plays a supplementary role in sectors such as agriculture and small- and medium-sized enterprises and in securities and futures market, an university's report says. That alternative credit pose a challenge to the government's macroeconomic policies.

Beijing (AsiaNews/Scmp) - Underground banking accounts for more than 28 per cent of new lending on the mainland, or about 800 billion yuan a year, according to a government-funded study.

A group of Central Finance and Economics University academics said in their report that 90 per cent of such lending was going to the securities and futures markets.

"The scale of underground lending stands between 740.5 billion yuan and 816.4 billion yuan and ... accounts for 28.07 per cent of total lending," said Li Jianjun , the chief author of the report.

The State Natural Sciences Fund sponsored the report, which will be released today.

Professor Li said the study estimated that black-market fund-raising by securities and futures operators totalled between 600 and 700 billion yuan.

However, the study's lead writer said underground banking was not necessarily bad as it played a supplementary role in sectors such as agriculture and small- and medium-sized enterprises (SMEs), where financial support from state banks was comparatively weak.

Yi Xianrong , an underground banking expert at the Chinese Academy of Social Sciences, agreed and said he had been calling on the government to restructure the strictly state-controlled banking and financial system to enable "underground banking to go above ground".

The study found that more than 33 per cent of fund-raising by the country's SMEs and more than 55 per cent of farmers' loans were made through underground banking and financial institutions.

Between 3 per cent and 4 per cent of the country's broad (M2) money supply was flowing underground.

"The booming underground banking activities convincingly suggest that the strictly state-controlled banking and finance system has become an obstacle suppressing the healthy development of privately-run banking and financial business in the country," Professor Yi said.

He said strict loan provisions had often made it hard for smaller private companies to obtain loans from state banks, leaving many with no option but to seek other sources of funding to expand their businesses.

The lack of investment tools on the mainland was another reason behind the underground boom as interest rates for savings were at an historic low, Professor Yi said.

Professor Yi said that alternative credit also posed a challenge to the government's macroeconomic policies because credit-tightening measures to cool an overheating economy were becoming less effective as companies increasingly turned to the black market for loans.

While official figures had showed a slowdown of growth in money supply and lending, other indicators pointed to increases in some sectors, especially in the private sector.

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