China's Supreme People's Court (SPC) on Tuesday issued a circular urging the proper handling of conflicts concerning private loans following a number of cases of bosses being unable to pay back informal high-interest loans, forcing enterprises to the verge of bankruptcy.
"Private loans, many of which occurred in obscurity, are very likely to create high-interest scandals, the bankruptcies of small and medium-size businesses, illegal fund collections and repayments forced by violence, resulting in personal assaults and disrupting the country's financial order," according to an explanatory document also issued Tuesday by the SPC.
Wenzhou, a city in coastal Zhejiang province that is known for booming private entrepreneurship, has been especially affected by a severe debt crisis since April.
More than 90 bosses of private companies in the city were previously reported to have disappeared, committed suicide or declared bankruptcy -- invalidating debts of about 10 billion yuan (1.57 billion U.S. dollars) owed to banks and individual creditors pooled from the informal lending market. The most recent runaway boss case occurred on October 18.
One prominent returned boss is Hu Fulin, president of Xintai Group, China's largest eyeglasses manufacturer. He fled to the United States to escape a 1.5-billion-yuan debt in September, but returned after banks agreed to relax repayment terms.
According to the circular, people's courts at various levels should resort to mediation as the first option in resolving cases regarding private loans, especially those involving multiple lenders or borrowers that are likely to lead to mass incidents.
Business people said they rapidly expanded their businesses during the credit binge created to stimulate the economy during the 2008-2009 global financial crisis, but found themselves unable to repay bank loans and subsequently informal high-interest loans this year when banks were ordered to tighten lending to curb inflation.
However, the circular stipulated that courts should not offer legal protection for lending activities involving illegal acts such as gambling or drugs. < Interest rates on private loans can be relatively higher for those set by banks, and local courts have the right to adjust the cap standards in accordance with the financial situation in their respective areas, but they should not exceed four times that of banks' interest rates, said the circular.
The SPC stressed timely rulings in cases involving illegal fund collection and severe punishments for gang-related lenders or borrowers responsible for "crimes of a violent nature."
"People's courts must abide by the principle of tempering justice with mercy, making judgements in accordance with the different natures of various cases," the circular said.
The document also made a series of judicial suggestions, including a severe crackdown on civil servants who participate in high-interest lending activities to seek personal gain and improved laws and regulations concerning the validity of intercompany loans.