A string of Chinese entrepreneurs have gone into hiding to avoid repaying loans, according to state media reports, highlighting a credit squeeze on private firms and the dangers of steep interest rates in China's vast and growing informal lending market.

Many cash-strapped firms are unable to borrow from banks amid a credit clampdown by Beijing, and some have turned to China's underground lending market -- which pools money from individuals and firms -- at annual interest rates as high as 100 percent.

The staggering rates, at more than 15 times China's benchmark lending rates, have pushed some firms to the limit.

In just one day last week, Chinese media reported that nine bosses of small-sized firms in China's entrepreneurial capital of Wenzhou, in eastern Zhejiang province, had skipped town after realizing they could not repay their corporate loans.

The private lending craze has fueled an economic bubble, and the 'runaway episode' in Wenzhou is a landmark event in the bursting of such a bubble, the official Financial News, a paper run by China's central bank, said in a report on Wednesday.

Among the bosses who have reportedly gone into hiding is the chairman of one of Wenzhou's prominent spectacles makers, Zhejiang Center Group Co. Ltd.

The well-known firm had harbored ambitions of a public stock listing, the China Business News said, but problems started in 2008 when it was squeezed by falling overseas orders, rising raw material costs and a firmer yuan.

Citing sources with knowledge of the matter, the newspaper said Zhejiang Center owes its suppliers between 50 and 100 million yuan ($7.8 million to $15.6 million). Calls by Reuters to the company's main number went unanswered.

Seven days after his (the board chairman's) disappearance, a few company managers are still reporting for work, China Business News reported after a visit to Zhejiang Centre's Wenzhou office.

But they are at a loss as to what they should do now.

Zhejiang Centre's website says it employs around 3,000 workers and has annual export sales of 500-600 million yuan.

Chinese officials have said repeatedly that they have detected no large-scale collapses among small firms in the country and that they do not face extreme credit shortages.

That point was reiterated on Wednesday by Lu Zhongyuan, vice head of Development Research Center, a cabinet think-tank.

Difficulties that small companies face are not mainly caused by tight credit, Lu said. The biggest problem faced by small firms is the rise in costs.


For the wealthy in China, lending their savings to firms at annual rates starting at around 36 percent is more lucrative than putting their money in banks that give negative returns.

China's one-year deposit rate stands at 3.5 percent, under the central bank's 2011 inflation target of 4 percent and significantly below actual inflation which recently has exceeded 6 percent.

A thriving underground lending market has bloomed amid savers' zeal to put their money to better use. The central bank estimated the market was worth 2.4 trillion yuan as of the end of March 2010, or 5.6 percent of China's total lending.

Speculative private lending has increased this year and has deviated from actual credit needs of the economy, said Fu Bingtao, an analyst at Agricultural Bank of China.

Fu said the risks to China's economy, the world's second largest, could be contained since the rampant lending is outside of the banking system and such loans are generally not used to fund speculative bets.

However, in its annual survey of Chinese banks released this month, accounting firm KPMG noted that credit woes faced by one small firm can affect its peers through debt triangles.

This happens when a firm that is short of cash delays payments to its suppliers, causing suppliers to suffer cash flow problems which in turn can affect others higher up the supply chain.

Banks are also not entirely insulated. Savers' reluctance to put their money in banks has sparked a war for deposits.

To win deposits, banks are paying for depositors' holidays within the country or their children's education, and offering job opportunities to their relatives, the Financial News said.

Yet for cash-rich savers, times are sweet.

An investment consultant in Beijing, who only gave his surname Bai, told Reuters he remits his salary back to the northern Chinese province of Hebei each month for his mother to lend to businesses.

The money that I lent at the start of the year had annual interest rates of 10 percent. Now rates have risen to 50 percent, he said. My 100,000 yuan of savings has grown to nearly 150,000 yuan.

But firms cannot afford such sky-high rates, said Zhou Dewen, head of the association for small- and medium-seized enterprises in Wenzhou. Many earn profit margins of between 3-5 percent so loan defaults may spike if rates do not ease next year.

Even Bai is worried for his borrowers.

My neighbors at home are lending at annual rates of 150 percent, he said. Which industry can enjoy such high profit margins? It's not like they are trafficking drugs. ($1 = 6.394 Chinese Yuan)

(Additional reporting by Shen Yan and Kevin Yao; Editing by Ken Wills & Kim Coghill)