China jails over 1,400 in loan-shark crackdown

China jails over 1,400 in loan-shark crackdown

Saturday, April 27, 2013

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BEIJING, China (AP) — Chinese authorities have sentenced more than 1,400 people to prison terms of at least five years for involvement in underground lending in a crackdown on a financing practice widely used by China's entrepreneurs, a police official said yesterday.

The 1,449 people imprisoned were among a total of 4,170 people convicted since 2011 of violating rules on loans outside the state-run banking system, said Du Jinfu, a Public Security Ministry official in charge of a task force on underground lending.

He said the rest received lesser penalties.

Entrepreneurs who generate China's new jobs and wealth are largely shut out of lending by government banks and rely heavily on informal lending by individuals. Loans are arranged by middlemen who are paid a fee and borrowers pay interest of 70 per cent a year or more.

People netted in the crackdown were convicted of violations including public advertising to find lenders and promising excessively high rates of return, Du said at a news conference. He gave no details.

Legal experts say loans between individuals are legal and the government has failed to make clear what lenders and borrowers are allowed to do.

"The distinction between illegal fund-raising and private lending still remains unclear," said the Dui Hua Foundation, a San Francisco-based group that researches China's justice system, in a report in February.

The crackdown threatens to crimp credit to entrepreneurs who the World Bank and other advisers say the government should be encouraging in order to keep China's economic growth strong.

Communist leaders have promised more bank lending to the private sector but entrepreneurs say they still have trouble getting loans.

The Cabinet announced a pilot effort last year in Wenzhou, a city in the southeast that is a centre for private industry, to test more closely regulated private lending.

Despite that, it is harder for entrepreneurs in Wenzhou to get loans, said Zhou Dewen, head of an association for small businesses there.

"Banks are offering fewer loans, because the bad loan rate is rising," said Zhou. "It is harder to get underground loans, too. People are more afraid of running the risk of lending money.

"_Du, the police official, did not explain whether the people punished in the crackdown were the final borrowers or middlemen who arranged loans for a fee, a common practice.

In a high-profile case, an entrepreneur from the southeastern city of Wenzhou, Wu Ying, was sentenced to death last year for "illegal fund-raising" though details were not disclosed. The 31-year-old woman, whose business success had been celebrated by state media, was convicted of improperly raising 770 million yuan (US$120 million) from investors in 2005-07.China's supreme court overturned Wu's death sentence following an outcry on the Internet over the severity of the penalty. She was re-sentenced to death with a two-year reprieve, which usually is commuted to a long prison term.

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