Not until recently, China has been a land where money seems to grow on trees. A couple of years ago, a U.S. fund went to China to raise money from Chinese investors. After the presentation, someone from the audience raised his hand. He asked the presenter to clarify whether the expected investment return of 10% meant monthly or annual. The presenter jokingly responded, "if you know of an opportunity that guarantees 10% monthly, please tell me. I want to invest my money." The person said, " Sir, few people in China will invest for a return of 10% a year." Long silence from the presenter.
The audience was not joking. Chinese investors have been lending to some privately owned businesses at absurd high rates, sometimes as high as 48%/year or higher. In theory, the money serves as bridge loans for a couple of months, but at times borrowers keep it longer.
Privately owned businesses are poorly served by banks. Working for big and fat State-Owned Enterprises often means less leg work, less risk and much bigger transaction in dollar amount. In need of capital for operations and expansion private companies often turn to private lenders, a reliable funding source. Business owners have to put up their houses, cars, manufacturing facilities, sometimes their marriage certificates, as collateral to lenders. Sadly once they borrow such loans they are trapped. They have to keep borrowing from new lenders to pay off the previous lenders. When source of funding dries up some borrowers either shut down their businesses and disappear, or tragically take their own lives.
On one hand, the world is taken by awe that Chinese companies are going through a shopping frenzy overseas, acquiring trophy companies, on the other hand, privately owned businesses cry out for growth and operational capital at home.