Trucks carrying coal head along the road in Shenmu, Northwest China's Shaanxi Province in November 2011, during better times for the coal industry. Photo: CFP

 

Shenmu, a county in Northwest China's Shaanxi Province that is known for its coal output, once gained nationwide attention for its enviable free medical care. It has been in the headlines again recently, but this time because its local private lending market is reportedly on the verge of collapse.

In the past, the county had a range of financial services comparable with large cities, with more than 50 financial institutions operating there, according to a report Thursday by China National Radio (CNR).

But now, many of the small loan companies have closed and some debtors have fled.

On July 15, a crowd of Shenmu residents gathered in front of the county government building following messages online about the serious state of Shenmu's economy and rumors that the current leadership plans to stop providing free medical services as the county is facing a 30 billion yuan ($4.9 billion) financial deficit.

Local officials denied the news about the deficit and four people were arrested for spreading false rumors.

But people are still concerned about losing their life savings, and the tensions in Shenmu's private lending market will be hard to deal with.

Some analysts have even said the coal-driven county might follow in the footsteps of Ordos in North China's Inner Mongolia Autonomous Region. Ordos used to be one of the richest cities in China, but is now facing a sharp economic downturn due to the sluggish coal industry.

Coal crunch

In the 1980s, Shenmu was found to have coal deposits in an area of 4,500 square kilometers, 59 percent of the county's total land area, with more than 50 billion tons of reserves in total.

With the improvement of local transportation facilities and a surge in coal prices since 2001, Shenmu has seen robust economic growth over the last decade.

The period from 2001-11 was regarded as the golden age for the development of the domestic coal industry, with coal prices rising by 70 to 80 yuan per ton every year.

But since 2012, China's coal industry has suffered from a slide in demand amid the domestic economic slowdown and increasing competition from cheaper imported coal.

The current coal price is around 300 yuan per ton, similar to the level four or five years ago, the Oriental Morning Post reported Thursday.

As the nationwide economy keeps slowing, Shenmu will suffer more from stagnant coal prices, Tian Yun, editor-in-chief of Macro China Information Network, told the Global times Monday.

In the first quarter of this year, work was suspended at 42 of Shenmu's coal mines, leaving only seven in operation, according to an economic analysis report posted in April by the government of Yulin, which has jurisdiction over 11 counties including Shenmu.

The mire of debts

A number of billionaires were created amid the boom in Shenmu's coal industry, many of whom ploughed their extra funds into the private lending market.

Some of them became notorious, such as Gong Aiai, who was dubbed "house sister" as she accumulated 41 properties covering 9,667 square meters in Beijing. Her wealth was amassed via coal mine financing, using loopholes in the rules regarding transfers of State-owned assets and private lending.

Using private lending is a common method for domestic small and micro enterprises to raise funds. The business is legal in China as long as the highest interest rate is no more than four times the rate offered by commercial banks over the same period.

For instance, the current one-year loan interest rate in the banking sector is 6 percent, so the rate in the private lending sector can be up to 24 percent.

But in Shenmu, the rate can be as high as 36 percent, with many coal mine owners willing to pay higher interest because of their need for funds to expand their production capacity, according to the Oriental Morning Post report.

Inspired by the high returns and large demand, most of the county's residents entered the private lending market. Some not only put all their savings into it, but borrowed more private funds in order to offer more loans, the report said.

But given that private lending capital in Shenmu has largely been invested in the local coal sector, many lenders are now facing the risk of losing all their life savings and being left with debts as the industry is stumbling.

Liu Qiyun, director of Shenmu's finance office, said in an interview with the Oriental Morning Post that most of the private lending went to the coal sector, with less than 20 percent flowing into the real estate industry.

Now local people have stopped lending money and are busy demanding repayment of loans so they can pay back their own debts. This is not an easy job and many of them are resorting to legal action.

This year, the local court has accepted 2,771 lawsuits related to private lending disputes, 756 more than in 2012 and four times as many as in 2011, media reports said.

Regulation needed

In response to the turbulence in Shenmu's private lending market, the local government has set up a special team to crack down on illegal fund-raising.

Liu noted that the government also plans to establish a private loan registration center, which could increase transparency in the private lending market.

Ye Tan, an independent economic commentator, told CNR Friday that the local government should freeze all new loans temporarily, and then restructure debts carefully.

The private lending market needs more regulation, in order to create a safe and healthy financing environment for small enterprises, said Ye.

But this will not be enough to free Shenmu from its economic downturn. "The government should introduce new emerging industries to revive the county," she noted.

The local government has also realized that relying on the resources sector is not good for economic development in the long term, and it is making efforts to push for an industrial transformation.

Non-coal industries, including services, agriculture and new energy, will be encouraged in the future. For instance, two agricultural projects worth over 30 million yuan each will gain support from the government in 2013, according to its 2013 social development plan.

"Both Shenmu and Ordos used the development model of over-reliance on natural resources, which is not sustainable, so now they are suffering a painful transition," said Tian, noting that the case is a warning to other local governments and shows that a well-balanced industrial structure is vital.