Investors gobbled up by loan sharks

By Cao Li (China Daily)
Updated: 2007-05-05 08:58

SHANGHAI: The prospect of cashing in on the stock market boom is sending more people to high-interest loan "sharks" in search of a quick injection of capital.

Last year the Shanghai Composite Index, the widely watched indicator for the Chinese mainland market, increased 130 percent, and it has grown 41 percent so far this year.

One private finance agency insider, who would use only his surname Wang, said business has soared since the market truly began picking up late last year.

Wang's agency charges a 3 percent monthly interest rate for every cent they lend.

For anyone who wants more than 150,000 yuan ($19,430), a guarantee of fixed assets will be needed something that has not intimidated investors eyeing a major profit.

"Many of the lenders told me they needed the money to invest in the stock market," Wang said.

"The market is sending investors, who want more profit from the market, to private financing agencies like ours."

And some agencies have gone to public notary services to protect their rights, according to officials at the No 2 Notary Office of Huangpu District in Shanghai.

Zhang Wen, the director of the office, said that the agencies normally signed two agreements with lenders.

"One stipulates the amount of the loan and the legitimate interest," she said.

According to Chinese law, the interest rate of any private financing cannot be more than four times that of a local bank.

"They will have this agreement notarized," Zhang said.

And the second agreement stipulates that a fixed amount of agreed interest will be deduced from the loan first.

"For example, if the second agreement says that 50,000 yuan, as the interest, will be deduced from a 300,000 yuan loan, the lender will actually receive 250,000 yuan only," she said.

"And then the lender will have to pay back the 300,000 yuan loan and interest according to the first notarized agreement.

"In this way, the lender will have to pay a lot more interest," Zhang said, before warning people against using these agencies,

Wu Dong, a local lawyer, said that people can quickly find themselves mired in heavy debt.

"We saw people borrowing from loan sharks to invest in the stock market during the 1990s' boom," he said.

"And many of them ended up in debt and lawsuits."

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