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Cash-strapped businessmen eye pawn shops for quick loans

(China Daily/Agencies)
Updated: 2009-02-24 07:28

When Chinese businessman Roger Zhang needed a bridging loan for his steel company, he went to a pawn shop to get a cash flow injection to keep his business afloat.

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Turned away by banks caught in the credit crunch, Zhang, like many Chinese businessmen, borrows 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, in 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, deputy business manager at Shanghai Oriental, the city's second-biggest pawn shop. "But we have a lower threshold and can provide loans much more quickly and with shorter terms."

From gold bullion to houses and factory equipment, customers are offering all sorts of assets to get loans from pawn shops.

An auto dealer pawned his downtown apartment against a 4 million yuan credit line to secure funds for his business. A real estate developer gave his unsold properties as collateral to get an emergency loan while waiting to secure bank funds.

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 as banks become more cautious toward small lenders.

Pawn shops charge clients a monthly rate of about 3.2 percent, much higher than about 0.44 percent for bank loans, but cash-strapped borrowers are attracted by their efficiency and convenience for short-term loans.

It takes as little as two hours for a pawn shop to assess the value of a property offered as collateral and about one week to put money in the hands of a qualified client. At a bank, the procedure for a small business loan would take at least a month.

Shanghai Oriental also allows clients to borrow money for periods as short as several days, which is impossible at banks. Pawn shop owners acknowledge, however, that their lending will remain just a drop in the ocean in China's financial system, even with rapid growth. Wang Fuming, Shanghai Oriental's chairman said: "The crisis has made us more focused on serving small businesses and I believe the industry has huge room to grow."

Nationwide, the industry as a whole is still tiny with only about 36 billion yuan in net assets spread among some 2,800 players, according to the China Pawn Association.

China's Ministry of Commerce has approved the issuance of 240 new licenses for 2009. "Pawn shops serve a small, niche market, so you couldn't expect it to grow into a big industry," said Sun Jian, analyst, Shenyin Wanguo Securities Co. "But in China's coastal provinces such as Jiangsu and Zhejiang, they've become a regular source of funding for small businesses."

However, at pawn shops, as well as banks, loan defaults are on the rise. Thousands of small businesses in China have folded in the global downturn, which has sent China's exports plummeting by 17.5 percent in January 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.

"The financial crisis has squeezed liquidity, and many companies face an acute shortage of cash. That's why demand has increased," said Martine Ma, general manager of Shanghai Hengtong Pawn Broking Co. "On the other hand, risks have also increased."

Sunny Loan Top Co, China's only listed pawn shop, estimates that its 2008 net profit dropped as much as 50 percent on asset writeoffs 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 Co. "Although business has increased, asset quality is deteriorating as companies go bankrupt due to the economic problems."

Since last year, Shanghai Oriental has taken a series of measures to ward off potential risks. It stopped taking shares as collateral, tightened scrutiny of applicants and adopted a more conservative approach in evaluating assets used as collateral, such as real estate.

"The crisis is putting us to the test on controlling risk," Wang Fuming said sitting in his office in a dingy building behind the pawn shop. Inside the store, counters were laden with jade, gold bullion, necklaces and pricey watches.

"We are luckier than some rivals who have been burned by the crisis." Established in 2002, Shanghai Oriental has extended 6.7 billion yuan in loans, of which about two-thirds are to small and medium-sized enterprises.

"About 90 percent of small businesses in Shanghai fail to get bank loans," Wang said. "The problem is more severe during a weak economy."

Pawn shops also face intensified competition as the government hands out more licenses and encourages the development of other non-bank lenders, such as small loan companies, to support China's private sector.