renzhi

Financing has always been a hard problem in China, especially for small and medium businesses. It is understandable that banks are reluctant to lend to small businesses, as credit evaluation system is almost nonexistent, although governments at different levels have been trying to establish some kinds of measures and evaluation mechanisms.

Businesses may need an emergency fund for a project that suddenly pops up. The demands are there, and supplies are limited. One way of funding the project is to dig out the life saving account, if you have enough cash in there. A second way is to borrow from friends and family. Both ways are probably common in most countries. A third way is to take personal valuables and go to a pawn shop, if you have valuables which are worth something, that is. A fourth way is to borrow from an underground money shop, which have very simple application process. That explains why underground money shops are flourishing. A fifth way is to participate in a “hui”, a temporary organization in which a group of people put in a lump sum into a pool, and every month, a “winner” of an auction will take a sum, minus the fee of the auction.

Now, some enterprising folks have found a new way to borrow from credit cards, lend the money out during the grace period for interest, and pay back at the end of the grace period. That’s how they usually operate:

1. Apply for a lot of credit cards with large credit line. That’s the easy part, credit card companies are eager to approve any application anyway.
2. Open an online shop that accept credit cards for payment.
3. Buy vaporware from your own online shop with the credit cards, by maxing them out.
4. Take out money from the online shop.
5. Lend it to people who need it, and but make sure that the borrower can pay back, with a large sum of interest, at the end of a month.
6. Receive back the money, with interest, and pay back the credit cards before the end of the grace period.

Up to now, online shops (most of them anyway) do not pay sales tax, although it is required by Chinese laws. There’s a price to be paid for accepting credit cards for payment, in the form of credit card processing rates and fees. However, the rate is quite low in China, usually at 2% as average, and as long as the lending interest rate is higher than the credit card processing rate, you can make profit in the rate difference.

Some underground money shops do that too, as a way of growing its own fund pool.

Profit!