David Huan had big dreams for his business, a factory in central China that makes picture frames ranging from glossy wood to the gilded and baroque.
He wanted to expand production, and add new equipment and 400 to 600 workers atop the 400 he already employed.
The demand was there last spring, he said on a recent afternoon. But his bankers weren’t. They balked at lending him money to buy equipment — and today his export-oriented business is about where it was six months ago.
“I feel like I’m walking in place,” he said.
He has lots of company. While many businesses in the United States struggle to stay afloat and workers collect unemployment checks, China has the opposite problem: an economy, pumped up by expansive lending by state-controlled banks, which is growing too fast to keep inflation and speculation in check.
Beijing’s solution: Create an artificial shortage of credit.
The central government has set stringent though undisclosed limits on how much money each bank can lend, clamped down on real estate speculation by limiting the number of mortgages allowed for each citizen and begun cracking down on many forms of semilegal and illegal lending.
After months of steady tightening, the controls have finally begun to bite into inflation, business growth, real estate prices and lending.
Lending by Chinese banks jumped 32.5 percent in 2009 in inflation-adjusted terms.
That growth slowed to 13.3 percent in 2010 and 7.3 percent in the first nine months of this year.
Lending to small businesses has grown slightly faster.
But there are so many small businesses and they are expanding so quickly that competition for these loans is especially fierce and difficult, said Nicholas R. Lardy, an economist at the Peter G. Peterson Institute for International Economics in Washington.
The policy makers’ principal goal is to tamp down inflation, which has played a repeated role in causing social unrest, including during the 1989 Tiananmen Square protests.
Despite a goal of limiting inflation to no more than 4 percent a year, prices have stubbornly remained about 6 percent higher this autumn than a year ago for consumers based on official gauges — and up to twice that by the estimate of many private economists.
The worst of the credit squeeze this year has compelled at least a few business people to flee the country or even commit suicide.
They did so after borrowing money at usurious rates of up to 5 percent a month — an 80 percent annual rate — from loan sharks or neighborhood lending pools and then finding that their speculative investments with the money did not pay off.
But the credit squeeze is far broader. In more than a dozen recent interviews at the Canton Fair here, the country’s largest export trade fair, every business owner or sales manager described increasing difficulties in borrowing money — as well as strategies that banks and borrowers alike are using to cushion the effect of the new lending restrictions.
Some banks are requiring lenders to personally guarantee corporate loans and put up considerably more land and factory equipment as collateral.
Others lend money only if borrowers agree to redeposit up to half of the loan in the same bank at a much lower interest rate. The practical effect is that the borrower pays a much higher interest rate than the official, heavily regulated interest rate for loans, usually 7 or 8 percent.
“If the bank lends you one million, they ask for 500,000 back as a deposit,” said Elaine Yan, the import and export manager at the Wuxi Zontai International Corporation, a trading company specializing in brightly colored shower curtains and bath mats.
The company has decided not to borrow money at all, meeting its modest financing needs through retained profits.
Daunted by such terms, Helen Huang, the owner of a company producing chrome-plated paperweights, turned to a neighborhood lending pool last year. The $3.1 million she borrowed helped finance a $7.9 million land purchase so her company, the Shijiazhuang Harmony Import and Export Company, could build a factory.
The lending pool, run by friends, charged only 7 percent a year, she said — similar to what a bank loan would have been, but without onerous paperwork or redeposit requirements.
The friends were seeking to earn more than the meager, regulated interest paid on bank deposits, currently 3.5 percent for a one-year certificate of deposit — a rate so low that, with 6 percent inflation, bank deposits actually lose buying power.
China has a long tradition of such family-and-friend lending pools, which finance many entrepreneurial businesses whose creditworthiness may be hard for banks to assess.
The legality of these pools is murky and depends partly on the extent to which they rely on new deposits to help pay interest to earlier investors.
With banks restricted from lending, businesses are taking different tacks to raise money. Some ask customers to make larger deposits when they place orders, for example, so that the factories can use the cash to pay for raw materials.
“I do try to ask for more deposits upfront, but customers are resistant,” said Ms. Huang, the paperweight maker.
The government’s tight grip on lending is producing results: Consumer inflation is slowly subsiding by official measures, to 6.1 percent in September from a peak of 6.5 percent in July. But in its place, one new concern is whether state planners have tightened too much.
Beyond slowing factory expansions, the lending curbs have hit real estate developers particularly hard, said Stephen Green, the chief China analyst for Standard Chartered Bank.
Many speculators, betting on ever-rising land prices, have parked their money in newly built offices or apartments that are largely vacant.
With credit scarce, some are unable to roll over the loans used to build the developments. While well-financed developers are barely cutting prices, weaker developers have begun quietly discounting new apartments by up to 30 percent in the last month; the latest official figures for changes in real estate prices were not yet available.
Others may be forced to sell or rent property at a deep discount, winding up underwater, like some American homeowners.
Cooling off land speculation was a major goal of the government’s tightening, Mr. Green said. But if the credit tightening isn’t carefully calibrated, he added, it could hit both developers and the economy too hard.
“I think generally the economy is showing signs of sand in the wheels — it’s beginning to slow things down,” he said of the tightening measures.
“If it turns out to be a macro problem, that’s one of the things that will cause the government to loosen policy sooner.”
And in fact, there are hints of just that.
The State Council, China’s cabinet, said in late October that it would experiment with lowering the value-added tax, which is typically 17 percent, at least for service businesses, potentially putting more money into circulation.
Premier Wen Jiabao also signaled some relaxation, saying late last month that planners would eventually “fine-tune” policies to ensure adequate growth in credit and the money supply.
While many business people are dismayed by the scant availability of credit, they are also painfully aware of inflation. Rapid economic growth has exposed shortages, particularly labor shortages, and sent prices soaring.
Ms. Huang, the paperweight maker, said that pay for skilled workers who can operate chrome-plating equipment had doubled just in the last year, to $630 a month.
Even with that increase, she has so much trouble finding workers that orders received last month will not be filled until March, she said.
Demand is surging even for unskilled workers in interior provinces far from the prosperous coast.
Mr. Huan said that competition for labor from other businesses had forced his company, Tennon Frame in Luoyang, a city in inland Henan Province, to raise wages this year to $150 a month before overtime and benefits, compared with $95 a month early last year.
“It’s crazy — China is going crazy,” he said.
- Keith Bradsher reported from Guangzhou and Michael Wines from Beijing.