Profitable practice plagued by persistent problems

WENZHOU, Zhejiang - Although the world around her reverberated with the sound of imminent collapse, 40-something Hua Xiang remained calm, sitting in her sparsely decorated office sipping tea with a guest.

As one of the thousands of underground money lenders in Wenzhou, she should be fretting as the credit crisis is sending droves of borrowers, mainly factory owners-turned -real-estate-speculators, into default. "It's scary out there," she conceded. "But what can I do, other than sit tight and hope that the ill wind will blow away without carrying me with it?" she sighed.

Hua is a typical entrepreneur in this boomtown in prosperous Zhejiang province. In her youth, she started her own steelmaking business, with money borrowed from relatives and friends. Business boomed and earned her enough money to buy a factory to produce in bulk for sale directly to buyers from other Asian cities and Europe.

Her husband, a civil servant, has always made a point of staying away from her business exploits. They have a son who is in university now. "I thought about retiring some years ago," she said. "The life of a factory owner is hard."

What's more, the intense pressure of competition, which kept trimming her already narrow profit margins, was taking a toll on her health. Her problem was compounded by the rising cost of labor and various intermediary production materials.

In 2006, many other Wenzhou entrepreneurs facing similar problems began to siphon off a chunk of their accumulated earnings for use in other ventures, primarily property speculation in Wenzhou and other cities in the neighboring Yangtze River Delta region, including Shanghai. Some of her friends tried to persuade her to join them. When she told them she didn't have enough spare cash, they offered her an easy solution: borrow from the underground banks.

"They told me that the money I could make in one property deal would cover all the expenses of my factory and more," Hua said. "I was seriously tempted."

However, she had a better idea. "I knew nothing about property and I didn't want to risk my money joining in a game over which I had no control," she said.

So, she gave loaned money to her friends to invest in whatever they wanted. This way, "I earn a fat interest income with minimal risk because they were friends," she said.

Soon, other friends heard of her exploits and asked to become partners in her small but burgeoning money-lending business. "I am not greedy," she insisted, adding that she has always adhered to a rule of lending no more than 1 million yuan ($157,000) to any one individual borrower. "I can spread my risk among many borrowers," she said.

That strategy protected her from the calamity that befell Wenzhou's underground banking market when the property deals of its many borrowers turned sour.

"I can manage," Hua said.0 "But for how long?"