To date, Yu Huan’s first verdict, media reports and his mother’s letter of petition for mercy for her son have given conflicting information about how much she owed to the lender behind the violence. But all these sources have confirmed that in 2014 and 2015 she borrowed more than US$160,000 at a monthly interest rate of 10 percent.
The annual interest rate that this resulted in has been reported differently by the verdict, Su’s petition and the Southern Weekly, but every calculation puts it much higher than the legal cap of 36 percent for private lending in China. Rates up to 24 percent are fully legal, while rates between 25 percent to 36 percent are subject to judges’ discretion. In the US, high interest rate small loans, typically payday lending, are governed on a state-by-state basis, ranging from legal, restricted or prohibited, subject to state law. 36 percent is the recently introduced US federal cap imposed on consumer financing products for those on active military duty, and they cannot use payday lending services.
Besides the brutality of Yu Huan’s case, the broader economic context has been enough to trouble the public. Unlike in the US or the UK where high-interest small loans today are typically granted by licensed institutions to individual consumers in need of a few hundred bucks, in China they have often been made by private lenders to small and medium-sized private entrepreneurs like Yu’s mother, Su Yinxia. They have relied on much larger loans since China’s economic take-off in 1980s when there were barely any commercial banks. This source of funding has remained important for their survival and expansion over the past few decades when banks have preferred lending to State-owned or large-scale enterprises. When the growth rate is high, the going is good. Once defaults rise in an economic downturn, so do disputes and violence on such loans.
According to the publicly available verdicts of cases from various local courts in Shandong and Hebei provinces, since 2015 Su Yinxia and her company lost a number of legal disputes as borrowers or guarantors involving more than US$6 million in debts to private lenders, banks and business partners. Her company makes and sells steel products, and began to struggle in 2014 when the sector was shattered in the economic downturn, revealing overcapacity in the steel industry.
Su’s story is not new or rare. In 2011, when China’s growth began to slow, the public and top policy makers were shocked by a number of cases in once-prosperous Wenzhou, Zhejiang Province, where heavily indebted entrepreneurs of small and medium enterprises (SME) fled, were kidnapped or even committed suicide. Various measures have been taken to provide mainstream access to capital for SMEs so that they do not have to resort to underground lenders. However, the efforts seem not to have worked well. SMEs have benefited from looser monetary policy much less than State-owned or large enterprises, and have also been hit much harder once monetary policy is tightened. They are also much more vulnerable to the boom and bust cycle in which loan sharking plays a role. Similar cases to those in Wenzhou broke out from time to time in different cities grappling with depression.
Private investment in the real economy (the manufacturing, engineering or delivery of tangible goods as compared to some online services or property speculation), where Su was operating, has been down for months, a major barrier towards a real growth rebound of the country’s economy from a seven-year slowdown. By contrast, mega cities have been binging on the real estate market, and banks have been enjoying higher profitability than the real economy. Financial News, a paper under China’s central bank, stressed in an editorial on Su’s case on March 30 that a better structured financing market is the key to avoiding similar tragedies happening again. The problem is that such an outcry has been ongoing for years already.
In addition, the credit crunch has recently spread to large, private companies. Right before and after Yu Huan’s case, several giants in their respective sectors, ranging from dairy, food and textiles to metals, new energy and real estate, had their massive debts exposed. They faced share price slumps or bankruptcy. Part of their debt was made up of massive high-interest private lending.
In this context, Su’s case has immediately fueled concerns over the crucial challenges for China’s economy, including the difficulties facing the manufacturing sector, private investment in the real economy and the country’s corporate leverage which is believed to be the highest in the world by any standard.