- Liren officials say they won't be able to repay the more than $300M in underground loan debt
- They cite losses in the property market and government credit restrictions
- Liren is among hundreds of companies in Wenzhou forced to borrow through underground loans
- Government has implemented credit curbs to cool economy and real estate sector
Nestled in the rolling hills about two hours south of Wenzhou in China's eastern province of Zhejiang lies scenic Taishun county, known for its green forests and natural hot springs.
For nearly a decade, about 80% of the county's more than 300,000 residents have enjoyed soaring profits reaped from investments in real estate deals by Taishun-based Liren Educational Group. Until recently, investors enjoyed rates of return as high as 36% on the back of China's red hot real estate market in the country's unregulated, underground loan market.
But as property prices cooled, so did the returns, as government officials in Beijing moved to reel in the nation's private credit market for real estate. Now Liren officials say they won't be able to repay the more than $300 million in underground loan debt due to losses in the property market and government credit restrictions.
At least 60 bosses from companies in Wenzhou have fled the city fearing retribution from their creditors who complain the government hasn't done enough. There is growing concern of an impending collapse of the private lending market, and private investors, like those in Taishun, are angry.
"We invested because the company seemed trustworthy," said an electrician, who asked not to be identified because of the threat of government reprisal. "Most of us are uneducated, so we couldn't invest in stocks. This was the easiest way to invest, and the returns were high."
When Liren Group announced its inability to pay back investors, he said he was stunned that his life savings of about $30,000 and the savings of thousands of others could disappear in an instant. But he said he was better off than some people who took out bank loans to lend money to Liren.
"When I first heard about this, my body went limp," he said. "But there are people who have it even harder than my family. Some elderly folks invested every penny they saved from hiking into the mountains to collect firewood. Now they have nothing left."
Before the credit crunch, some private lenders in Wenzhou received up to 70% in rates of return, a steep markup from the state bank's average interest rate of 6.6 percent. At least one-fifth of Wenzhou's more than 350,000 small and medium-size businesses have been forced to close, state media reported. Some are even fleeing the city.
Liren is just one of hundreds of companies in Wenzhou that have been forced to borrow through underground loans and now are suffering from credit curbs implemented by the government to cool an overheated economy and real estate sector.
Economists blame the looming debt crisis in Wenzhou on a lack of government regulation and investment options for average Chinese citizens that fueled a billion-dollar underground loan market across China.
"One of the problems is the public sector is not open to the private sector, so people with some money can't open schools or hospitals; there are not a lot of options," said Stephen Green, head of greater China research at Standard Chartered. "People are always looking for increased returns, so they'll turn to what's available."
In an effort to step in, the central government implemented measures last month to assist small businesses. Chinese Premier Wen Jiabao said last month in Wenzhou that the government would help entrepreneurs of small-to-medium size businesses get loans from the bank.
But Green said regardless of government initiatives to help provide small to medium-sized businesses with loans, the housing market is unlikely to bounce back soon, as Beijing clamps down on inflation aiming to cool GDP growth that hit 9.5% in the last quarter that ended in June.
At the Liren loan office in downtown Taishun where investors deposited their money for years, dozens of citizens streamed in to complain and sign contracts stipulating how the company could pay them back in full over the course of five years. Most of the lenders said they still didn't trust the company and refused to sign any contracts unless they were government-backed.
"I don't think what they are doing is fair," said a laborer from Taishun who had invested thousands of dollars in Liren. "There should be a clear judicial process."
Tens of thousands of residents in Taishun, many of them poor farmers and street vendors, have been affected by the company's losses. They complain that Liren wasn't open about its investments - when they thought Liren was investing in schools, the company was actually pouring money into speculative real estate projects similar to other Wenzhou-based companies that drove up housing prices around the country.
The electrician said protesters who marched in front of the Liren headquarters in Taishun last week were taken away and have not been heard from. Calls to the group rang unanswered on Wednesday, and CNN's request for an interview at the Liren loan office was denied.
A few streets from the loan office, a notice posted on the entrance of the Taishun county government compound says without prior government approval, citizens are banned from protesting, airing their grievances, and calling media outlets. Those who do so will be detained, it warns.