Debt panic in Wenzhou, China's entrepreneurial heart, raises spectre of wider economic trouble
Elaine Kurtenbach, The Associated Press, On Tuesday October 18, 2011, 5:24 am EDT
By Elaine Kurtenbach, The Associated Press
WENZHOU, China - Wenzhou's private entrepreneurs, scrappy survivors in an economy ruled by state industries, once thrived on a formula of cheap backstreet loans and low-cost manufacturing.
Now, they're at the centre of what some have dubbed China's own subprime debt crisis, a festering mess of borrowings gone sour that has become one of the weakest links in the economy — at a time when strength here is most needed to offset weakness in the U.S. and Europe.
"Do anything, but not manufacturing in China!" exclaimed Yang Guanghua, boss of a Wenzhou electroplating factory. Unable to collect from customers who themselves have no money, Yang said he stopped paying salaries two months ago.
"I can't get raw materials because suppliers are afraid I will run away," Yang said. "It's just impossible to get loans from the bank unless you have connections," he said.
Wenzhou's factory bosses are caught in a dire credit crunch. Pyramids of high-interest private lending are collapsing as companies whose profits are dwindling due to rising costs and weakening demand default on their debts. Dozens of tycoons have skipped town. The government has intervened, but many worry the stopgap measures will not prevent the problems from getting worse.
The true scale of informal lending nationwide, much of it derived from bank loans originally intended for other purposes, is unknown. But such lending has ballooned because the reluctance of China's state-run banks to lend to small and medium-sized businesses has been compounded by government curbs on credit to cool inflation. Interest charged by private lenders can be as high as 90 per cent, inviting comparisons with dodgy investment schemes.
"I have to conclude that this business is now a Ponzi game, relying on new money to pay off the old money," said Andy Xie, a Shanghai-based economist who travelled the Wenzhou region over the past two months researching the situation. "If not checked, this could lead to a national calamity," he said.
UBS economist Tao Wang puts informal lending at between 2 trillion yuan to 4 trillion yuan ($314 billion-$628 billion), or up to 10 per cent of China's GDP. There is little immediate impact on China's massive state-run banks from some of these loans turning bad. The bigger risk is Wenzhou's credit squeeze spreading to other parts of the world's No. 2 economy.
Though Wenzhou, a city of about 9 million on China's southeastern coast, accounts for less than 1 per cent of the country's economic output, it has an outsized impact on China's manufacturing and its financial markets.
Almost all Wenzhou's business is privately owned, much of it by the city's more than 400,000 small and medium-size enterprises.
The city's tycoons hold an estimated 800 billion yuan ($126 billion) in private capital and are renowned for driving speculation in property, coal mining and other commodities.
Mercedes, Cadillac and Toyota dealerships line the roads — attesting to the personal wealth that has left the city's nighttime sidewalks chockablock with parked cars and its streets choking with smog.
Vast chunks of the city are walled off for construction of luxury apartment complexes such as Noble Peninsula and Platinum Garden, while modern amenities such as a subway line are lacking.
Much of the estimated 500 billion yuan ($79 billion) in private borrowing in Wenzhou went not to manufacturing, but instead to potentially higher return investments in property or commodities — or to still more lending by the borrowers themselves.
"When banks cut off lending, businessmen went to the high-interest informal lenders, figuring that a month or two later they'd get loans again to repay their other debts. But the banks are not lending so they ran out of cash," said Yu Jingliang, owner of Zhejiang Pacific Paper Co., which deals in disposable moist towelettes and toilet seat covers.
What might in normal times have been a brief liquidity squeeze became a death grip, as banks ordered to keep record levels of funds in reserves to fight inflation withheld even routine loans.
Some of the tycoons that skipped town, including Hu Fulin, owner of Zhejiang Center Group, a major eyeglass maker, were convinced or coerced into coming back. A few committed suicide.
Despite the domination of state banking and enterprise elsewhere in China, private businesses account for roughly 80 per cent of new job creation and are vital to the country's exports.
With the problems spreading to other regions, including the Gobi desert boomtown of Ordos, China's leaders stepped in, ordering banks to lend more and to relax repayment terms for small and medium-sized enterprises. Loan sharks and other informal lenders were reminded not to use violence or other drastic measures to collect debts.
Meanwhile, the government is slashing taxes and promising faster processing for export tax rebates.
The emergency measures, and a morale boosting visit by Premier Wen Jiabao and other top economic leaders, appear to have eased the recent panic.
But more needs to be done, says Chen Shishang, founder of Senken Group, a maker of police vehicles, warning lights, sirens and riot gear.
"From the surface, it looks like the situation is somewhat under control. The government policies are coming and the banks are beginning to adjust, but many companies are still in crisis," Chen said in an interview in his office, an elegant haven of beige marble, oil paintings and ceramics at the company's headquarters in a grimy industrial zone in southern Wenzhou.
"We really need for the government to carry through with its help. We need more support measures," Chen said. "It's like a natural disaster. If everyone comes to help it won't be so dangerous."