Ad Hock Capitalism in China

In China’s land of economic contradictions, pawnshop visitors aren’t just the down and out. They’re also the up and coming--entrepreneurs spearheading the country’s long march toward market reforms.

The pawnshops help them out by taking as collateral real estate, luxury cars, stocks and bonds. But the shops are flexible, if all you have is a stamp collection, computer equipment or even abstract paintings you drew yourself.

“People who make millions come to me for help because, hey, even the emperor has a bad day once in a while,” said Ma Ding, manager at a Shanghai pawnshop.

The second-oldest profession on Earth owes much of its rebirth in China to the problems plaguing the Communist banking system. Private businesses have virtually no access to commercial loans from state banks, which are struggling with mountains of bad debt from lending to poorly operated state-owned industries.

And the development of a personal credit system, even the use of credit cards, is still in its infancy and far from able to provide cash on demand.

So pawnshops are becoming all-purpose lending institutions: They help small businesses by providing funding for payrolls, business supplies, restaurant openings, marketing expenses--even real estate projects and art exhibits.

Pawnshops will go to great lengths to provide whatever the Communist banks can’t or won’t yet offer, feeding the cash-starved soldiers of China’s economic revolution.

“The No. 1 challenge facing small and medium enterprises is funding,” said Zhang Lingxiao, a manager at the business service center run by the Bank of China. “Banks are reluctant to lend to them because they have little credit history and little appropriate collateral. It’s very hard for them to qualify.”

In the early years of Communist China, pawnshops were attacked as a symbol of class oppression. Beijing shut them down in the 1950s, along with all other forms of private enterprise.

The doors to pawnshops didn’t reopen until 1987, and demand was so great that the number of brokers nationwide climbed to more than 4,000. But with the healthy demand came shady operators who used the shops to launder money and stolen goods.

To stop the proliferation, Beijing placed pawnshops under the jurisdiction of the central bank in the 1990s. The number of shops shrank to about 1,200, and no new ones were allowed to open.

Then, last August, Beijing switched gears again, releasing pawnshops from the grip of the central bank.

“China’s pawn industry has explosive growth potential, but, like the stock market, it is just beginning to open up,” said Ma, the 37-year-old manager at Heng Tong Pawnshop in Shanghai.

From the marquee to the service counter, pawnshops in China’s major cities are visual copycats of modern state banks. Large marble counters and clear glass dividers have long replaced hard-to-reach small windows with metal bars, which were trademarks of traditional Chinese pawnshops.

Ordinary citizens go to pawnshops to obtain loans to pay for emergency hospital bills, school fees, job search expenses, even vacations. Such a step was unthinkable during Mao Tse-tung’s era, when the state paid for everything, assigned jobs and restricted travel.

Entrepreneurs looking for a hassle-free bailout are regulars at the shops.

“They are a huge help to private businessmen like myself,” said Jiang Hua, owner of a Shanghai printing shop who frequently pawns his diamond ring and Rolex watch to solve cash-flow problems. “All my friends who run small businesses use them.”

Ma believes in the future of the trade so much that he’s taken it to cyberspace, creating a Web site (https://www.pawn.com.cn) to educate the public about the business and sell pawned merchandise.

“There are still a lot of people who don’t know about us and are shocked to find out that a Communist country has pawnshops,” Ma said.

Majority of Patrons Own a Business

More than 60% of his clients run a business of some sort. One man, Ma remembers, was desperate to buy fancy utensils and pay chefs so that he could open his restaurant in time for Christmas Eve. He arrived at the pawnshop in his Mercedes-Benz. Ma gave him $7,000 on the spot.

Then there was the optometrist who needed a few hundred bucks to pick up merchandise from an out-of-town factory. All he had was a digital camera. Ma made him a deal.

But when a 70-year-old retired Communist Party cadre asked for $2,400 to open an art gallery in northern China, Ma wasn’t so sure. The man gave him a bunch of homemade calligraphy scrolls and abstract paintings that no other pawnshops wanted.

The paintings still hang in Ma’s shop. He knew that there would be no takers, but he was moved by the old man and gave him a few hundred dollars anyway.

The majority of his clients, however, are able to reclaim their property within weeks, paying about 5% interest for a monthlong loan. In California, by comparison, the maximum monthly interest rate that banks can charge on loans exceeding $1,650 is 1%.

The Chinese government now bars pawnshops from doing more than $600,000 worth of business a year. It also forbids them to borrow money from banks to increase their trade volume. New regulations that may come as early as April are expected to ease these restrictions.

Without the restrictions, Ma said, there’s no telling how big the deals could get.

For those who worry that they may lose face if they are seen at a pawnshop, many stores have a service entrance in the back, said Wu Xianda, president of the Shanghai Pawnshop Assn.

“My generation has never seen a pawnshop before. We are not too familiar with it, so the first time can be a little uncomfortable,” said Lu Yande, 48, owner of a construction company who has been to Ma’s shop four times in the last three years. “But there’s nothing to be ashamed of. I’m not the only person with cash-flow problems. At least I have valuables I can turn into cash and keep the business going.”

Big-Ticket Items Include Real Estate

Dealings in real estate are the most complicated. Proof of ownership and property value are often difficult to sort out. Many homes are still subsidized by the state or jointly owned by multiple family members. Yet no shop can afford to pass up the big-ticket item.

“Pawnshops in other countries tend to deal primarily in gold and jewelry. But in China, we’ve lived under a command economy for so long, we don’t own a lot of expensive accessories. If a small business needs $10,000 fast, what do they do? The most valuable thing they have is real estate,” said Yuan Jingzhi, secretary-general of the National Pawnshop Assn., based in Tianjin, southeast of Beijing.

Ma had a client who opened a piano bar in Shanghai. Business was not good, and he ended up $100,000 in debt. The only way to pay it back was to pawn the luxury apartment he had bought his wife as a birthday present.

Another man was trying to market a new medication for diabetes. He needed about $40,000 to publicize the product and host a launch party. So he put his house on the line and got the cash.

“If you go to the bank, there is a ton of paperwork and there is no telling they would even consider your property,” Ma said.

Electronic Goods Are Not Choice Collateral

Some pawnshops have become more selective. The price of electronic appliances, especially TVs, has been dropping so much, they’re no longer considered good collateral. Neither are most cell phones, because technology, like fashion, is ever changing and products quickly become obsolete.

“We prefer real estate, but we mostly deal in cars--Mercedes-Benz, BMW, sometimes Honda and that Volkswagen joint venture, Santana, that’s made in Shanghai,” said Sun Shenghua, who owns a pawnshop in the bustling coastal city of Wenzhou, south of Shanghai.

So far, real estate has proved the most risky. In the central Chinese city of Chongqing, for example, as many as one-third of the pawnshops have lost money or gone bankrupt because of careless real estate loans. Bad luck also pushed some to innovation. A pawnshop there last year joined hands with a local securities brokerage and a Web site to help customers trade in their stocks for cash.

“We had to explore new services,” said Wu Chengxue, head of Yucai Pawnshop in Chongqing. “It’s for our survival.”