Swimming with loan sharks

Killing draws attention to struggling local counties plagued by debt violence

Loan- sharking has been thriving in many cities in East China’s Shandong Province since around 2010

Economic troubles, the difficulty small enterprises face in getting loans from legitimate lenders and a lack of supervision contributed to the growth of loan sharks

The loan sharks are often paired with debt collectors and even gangs. Violence is often caused in the process

The controversial case of a Shandong man who was sentenced to life in prison for killing a loan shark’s henchman who threatened and humiliated him and his mother has generated wide discussion in China.

Yu Huan, 23, used a fruit knife to stab four debt collectors who beat and shamed his mother Su Yinxia when they came to his office to demand money in April 2016. One of the debt collectors subsequently died.

The case began in 2015 when Su borrowed 1.35 million yuan ($ 196,101) from Wu Xuezhan, a loan shark in Guan county, Shandong at a monthly interest rate of 10 percent. She paid back 1.84 million yuan in cash and gave Wu a property worth around 700,000 yuan. She still owed Wu 170,000 yuan when the debt collectors went to her office to collect money.

While many people argue that a life sentence is too harsh a punishment for Yu, who was apparently defending his mother, many are shocked at how the loan- sharking industry could have thrived in the Shandong county.

Last resort lenders

Guan county, dubbed “China’s bearing hub,” is known for its bearing and pipe industry. In 2010, an industrial zone was established in the county. That year, Su Yinxia moved her manufacturing factory there.

But the economic downturn in recent years has left many small businesses in a tough situation. In July 2014, at a meeting discussing local industries, a county official expressed pessimism about the future of the local economy. He especially emphasized the problems in the bearing industry. “The products are low- end and face challenges from large companies.”

Although many companies were eligi- ble for loans from commercial banks, the long review process and the red tape they face meant that legitimate lenders often could not meet their urgent needs. Many therefore resorted to private loans, the county official said.

The plunge in steel prices in 2012 also aggravated the situation. A business owner who declined to be named told Caixin magazine that since 2012, as the steel price dropped, many banks started to reduce or rescind loans.

“The banks told the businesses that they needed to repay their loans first to get new loans, but after they repaid them, they wouldn’t loan them any more money,” he told Caixin.

As a result, over half of the bearing businesses in the county had to borrow cash from loan sharks, resulting in the prosperity of the private loan market. One unnamed business owner said he has relatives who borrowed 3 million yuan from Wu Xuezhan, the loan shark in Su’s case, and still has 1 million yuan left to pay back.

The true scale of the underground loan market in Guan county is unknown. But in 2012, in Shandong’s Zouping county, not far from Guan county, the illegal loan market was estimated at over 100 billion yuan, higher than the local GDP, local media reported.

There, over 30 people have died of suicides or violence related to debt collection over the years.

Cop killers

In Guan county, loan sharks often call themselves “investment companies.” In around 2012, the annual interest rate for deposits at legitimate banks was 5 percent at best. But the interest rate offered to depositors by these “investment companies” was way over 5 percent each month.

“This means if you save 100,000 yuan with one of these investment companies, you can get over 5,000 yuan in interest each month. That’s more than many people’s monthly salary,” Yu Ming, a former manager at one of these companies, told Everyday People, an online magazine.

“Businesspeople hope loan sharks will help lift them out of their cash flow or triangle debt problems. They don’t realize this will be the start of their nightmare.” Liu Jianchao a loan shark in a city in Northeast China’s Liaoning Province

In 2012, the number of investment firms grew in Guan county like cancer, and many loan sharks became overnight millionaires. Yang Lei, a Guan county native, recalled that luxury cars worth over 1 million yuan started to show up in the county around 2012. “Those loan sharks are so rich that they can do whatever they want,” he told Everyday People.

Yu witnessed the debauchery of people in the business. “Employees at these firms go to karaoke bars every night and squandered their cash,” he said. Many people rushed to find a jobs in these firms, attracted by high income and a lavish lifestyle.

Yu said the highest interest rate he has loaned out was 15 percent each month. “The borrower was the boss of a local company and had good reputation. He ran into cash flow problems and needed 1 million yuan for a month. One month later, he paid me 1.15 million yuan,” he said.

Businessmen are often the loan sharks’ biggest clients, rather than people who are really facing destitution.

“We don’t lend money to poor people. We like businesspeople or those who own a shop or something. They hope loan sharks will help lift them out of their cash flow or triangle debt problems. They don’t realize this will be the start of their nightmare,” Liu Jianchao, a loan shark in a city in Northeast China’s Liaoning Province, told the Beijing News.

The incredible interest rates attract many to deposit their money at these investment firms to get good returns. Some people even mortgage their houses to legitimate banks to get loans, and then save the money at these “investment companies” to get higher returns.

“There’s a popular saying in Guan county that saving your money in these investment firms is the only way to bridge the wealth gap,” Yang said.

Yang said that these investment companies have connections with both “the black side and the white side,” implying ties with the local government as well as with illegal gangs. Those who “invest” their money through these companies include people from all walks of life, including local officials.

Local officials are explicitly involved in some of the cases. At the height of Zouping’s loan- sharking frenzy in 2012, a village official, who offered loans at high interest rates, orchestrated the killing of a policeman who went to the village to investigate, the Southern Weekly reported then.

Last July, a whistle- blower named Liu Jianghan from Linyi, Shandong uploaded a video, reporting that local officials in Linyi are offering loans at extremely high interest rates.

Liu underwrote for a business which borrowed 5 million yuan from an association. When the business couldn’t pay back, the loan became her responsibility. So she announced in the open that the loan- sharking association was under Linyi’s economic development zone in July 2015. After the business paid back 1 million yuan in July and 1 million in October, the loan remained high at 5.11 million in October, as the business was unable to pay more.

Debt beyond death

Another part of loan- sharking is debtcollecting, in which intimidation, threats, and violence are used to make and collect on loans. Many debt- collecting teams charge 10,000 to 30,000 yuan for each task, and if they successfully get the debtor to pay, they get 30 to 50 percent of the total debt, China Youth Daily reported.

Last year, Shandong’s provincial television station revealed a video which was used as training material for debt collectors in these investment companies. In one video, the instructor encouraged the collectors to use violence to collect debts, advising that they should push hard on the debtor or his family even if the debtor has died.

Yu said stalking the debtor all day long is a common method used by these collectors. “Over a dozen people do nothing but follow the debtor, including when he has dinner and goes to the toilet. It drives the debtor mad,” he said.

But this kind of harassment often escalates to intimidation and violence. “There are companies which pour out red paint in front of businesses which owe money, and those who threaten the debtor’s family members. And those who lock them up in a private place,” Yu recalled.

Shaming is another useful method. Zhao Zhiming, who has worked in a debt- collecting team in Liaocheng, Shandong, said he would go to the debtor’s hometown and revealed his deeds to his parents and local Party official. “We’ll publicize his debts in his hometown and see if he feels humiliated,” he told China Youth Daily.

Debt- collecting is in a legal grey area. In 1993, China’s State Administration for Industry and Commerce stated that all industries and commerce authorities should stop approving the registration of debt- collecting companies. Many debtcollecting companies have been fined for illegal operations. But many such teams in Shandong are not registered companies and therefore don’t violate rules regarding company registration.

Gao Xiang, director of Comparative Law Research Institute at the China University of Political Science and Law, told China Youth Daily that China has failed to protect victims of loan sharks, and should step up its crackdown on violent debt- collecting.