systematic and legal problems in China’s
economy, which could also make usury at
least less rampant and violent than it is.
Snowballing Debt
To date, Yu Huan’s first verdict, media re-
ports and his mother’s letter of petition for
mercy for her son have given conflicting
information about how much she owed to
the lender behind the violence. But all these
sources have confirmed that in 2014 and
2015 she borrowed more than US$160,000
at a monthly interest rate of 10 percent.
The annual interest rate that this resulted
in has been reported differently by the ver-
dict, Su’s petition and the Southern Weekly,
but every calculation puts it much higher
than the legal cap of 36 percent for private
lending in China. Rates up to 24 percent are
fully legal, while rates between 25 percent to
36 percent are subject to judges’ discretion.
In the US, high interest rate small loans, typi-
cally payday lending, are governed on a state-
by-state basis, ranging from legal, restricted
or prohibited, subject to state law. 36 percent
is the recently introduced US federal cap im-
posed on consumer financing products for
those on active military duty, and they can-
not use payday lending services.
Besides the brutality of Yu Huan’s case, the
broader economic context has been enough
to trouble the public. Unlike in the US or
the UK where high-interest small loans today
are typically granted by licensed institutions
to individual consumers in need of a few
hundred bucks, in China they have often
been made by private lenders to small and
medium-sized private entrepreneurs like Yu’s
mother, Su Yinxia. They have relied on much
larger loans since China’s economic take-off
in 1980s when there were barely any com-
mercial banks. This source of funding has
remained important for their survival and
expansion over the past few decades when
banks have preferred lending to State-owned
or large-scale enterprises. When the growth
rate is high, the going is good. Once defaults
rise in an economic downturn, so do disputes
and violence on such loans.
According to the publicly available verdicts
of cases from various local courts in Shan-
dong and Hebei provinces, since 2015 Su
Yinxia and her company lost a number of
legal disputes as borrowers or guarantors in-
volving more than US$6 million in debts to
private lenders, banks and business partners.
Her company makes and sells steel products,
and began to struggle in 2014 when the sec-
tor was shattered in the economic downturn,
revealing overcapacity in the steel industry.
Su’s story is not new or rare. In 2011, when
China’s growth began to slow, the public and
top policy makers were shocked by a num-
ber of cases in once-prosperous Wenzhou,
Zhejiang Province, where heavily indebted
entrepreneurs of small and medium enter-
prises (SME) fled, were kidnapped or even
committed suicide. Various measures have
been taken to provide mainstream access to
capital for SMEs so that they do not have to
resort to underground lenders. However, the
efforts seem not to have worked well. SMEs
have benefited from looser monetary policy
much less than State-owned or large enter-
prises, and have also been hit much harder
once monetary policy is tightened. They are
also much more vulnerable to the boom and
bust cycle in which loan sharking plays a role.
Similar cases to those in Wenzhou broke out
from time to time in different cities grappling
with depression.
Private investment in the real economy
(the manufacturing, engineering or delivery
of tangible goods as compared to some online
services or property speculation), where Su
was operating, has been down for months, a
major barrier towards a real growth rebound
of the country’s economy from a seven-year
slowdown. By contrast, mega cities have been
binging on the real estate market, and banks
have been enjoying higher profitability thanthe real economy. Financial News, a paper
under China’s central bank, stressed in an
editorial on Su’s case on March 30 that a bet-
ter structured financing market is the key to
avoiding similar tragedies happening again.
The problem is that such an outcry has been
ongoing for years already.
In addition, the credit crunch has recently
spread to large, private companies. Right be-
fore and after Yu Huan’s case, several giants
in their respective sectors, ranging from dairy,
food and textiles to metals, new energy and
real estate, had their massive debts exposed.
They faced share price slumps or bankruptcy.
Part of their debt was made up of massive
high-interest private lending.
In this context, Su’s case has immediately
fueled concerns over the crucial challenges
for China’s economy, including the difficul-
ties facing the manufacturing sector, private
investment in the real economy and the
country’s corporate leverage which is believed
to be the highest in the world by any stan-
dard.Boon or Trap
The overwhelming call so far is to crack
down or even ban money lending. But a few
Chinese economists have gone as far as to hail
money lending as a market blessing for des-
perate private companies which are turned
down by banks and relatives. A more mod-
erate argument which has thus gained more
support calls for deregulation of the lending
market. “Many commentators [on Yu Huan’s
case] have failed to see the lack of rule of law,
damaged social morality and distorted finan-
cial system. Their blaming of money lending
as the culprit for the tragedy [of Yu Huan]The factory where Yu Huan stabbed thugs who had used violence when calling in debtsPhoto by CFP