WHEN Chinese businessman Roger Zhang needed a bridging loan for his steel company, he went to a pawn shop to get a cash injection to keep his business afloat.
Turned away by banks caught in the credit crunch, Zhang, like many Chinese businessmen, borrowed from pawn shops instead. In this case, he paid off the loan a few days later, when a customer made payment on a big steel purchase.
‘The financial crisis has an obvious impact on our businesses. There’s a shortage of liquidity in the market,’ said Zhang, whose business is in Wenzhou, eastern China.
With China’s economy stumbling along at its slowest growth in seven years and banks wary of lending as defaults rise, small business operators are hocking belongings and company assets for loans from pawn shops.
‘Banks are reluctant to lend,’ said Huang Jing, the deputy business manager of Oriental Pawn in Shanghai, the city’s second-biggest pawn shop. ‘But we have a lower threshold and can provide loans much more quickly and with shorter terms.’
Banned at the start of the cultural revolution, pawn shops were considered a form of capitalist exploitation preying on poor, desperate people. They remained outlawed for two decades until 1987, but they are now doing a brisk trade.
Customers are offering all sorts of assets to get loans from pawn shops.
A car dealer pawned his downtown apartment against a four million yuan (N$5,9 million) credit line to secure funds for his business. A property developer gave his unsold properties as collateral to get an emergency loan, while waiting to secure bank funds. And a construction company owner hocked his villa to get a loan to pay workers’ salaries.
They are all typical of a growing number of business owners in China taking out pawn shop loans to maintain cash flow, as an economic slowdown hurts sales and banks become more cautious.
‘The financial crisis has squeezed liquidity, and many companies face an acute shortage of cash. That’s why demand has increased,’ said Martine Ma, the general manager of Shanghai Hengtong Pawn Broking. ‘On the other hand, risks have also increased.’
Loan defaults are on the rise at pawn shops as well as at banks.
Thousands of small businesses in China have folded in the global downturn, which has sent exports plummeting by 17,5 percent last month, compared to a year earlier.
Meanwhile, the value of many items used as collateral for pawn shop loans, such as gold and copper, has plunged.
Competition is rising as the government hands out more licences to other non-bank lenders, such as small loan firms, to support China’s troubled private sector.
Sunny Loan Top, China’s only listed pawn shop, estimates that its 2008 net profit dropped as much as 50 per cent on asset write-offs after several major clients, hit by the economic crisis, defaulted on their loans.
‘The economic crisis is not a blessing for all pawn shops,’ said Wei Tao, an analyst at China Securities. -Nampa-Reuters
