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‘Chinese Medicine’ Fails to Cure Credit Crunch
Despite pledges of financial reform from Beijing, businesses in Wenzhou—and throughout the country—still struggle to obtain loans from banks
By SHEN HONG
Nov. 24, 2015 11:06 p.m. ET
WENZHOU, China—At the peak of a dramatic local credit crunch in October 2011, China’s then Premier Wen Jiabao paid an emergency visit to the eastern coastal city of Wenzhou, known as the country’s capital of capitalism.
To combat a collapse of its underground banking system, which had financed the once-thriving private sector, Premier Wen unveiled an ambitious reform agenda that would get cash flowing to businesses.
Four years later, few of the reforms have materialized and Wenzhou is full of empty buildings and abandoned factories. “It was a big disappointment,” said Zhou Dewen, chairman of the Wenzhou Small and Medium-Sized Enterprises Development Association. “Small businesses’ funding difficulties have actually worsened, not just in Wenzhou but across China.”
Beijing has made similar promises of financial reform for the entire country as it tries to maintain China’s strong growth rate. But for most businesses and consumers, little has changed on the ground.
The recent decline in economic growth and stock-market crash have led Beijing to undo some of the few reforms in place. Beijing’s crackdowns on shadow banking and corruption and its fear of capital flight had already made it harder for small companies to borrow.
Economists say the main flaw in China’s financial system is that giant state-owned banks pay government-mandated low interest rates to depositors and then lend cheaply to giant state-owned companies. Savers are shortchanged while small- and medium-size businesses serving consumers or providing services can often be starved of funds.
To address these issues, Beijing has promised to let the market play a bigger role in policy. The government liberalized deposit and lending rates at banks, said it would revamp stock-market listing rules, make it easier to move money into and out of the country and allow its currency to trade more freely.
One big change would have allowed investors and businesses, rather than the government, to determine which companies could carry out initial public offerings on China’s stock markets.
Plans to overhaul the IPO system have been delayed for more than a year. In its effort to halt China’s stock-market crash, the government just lifted a four-month ban on IPOs but it is unclear when the hundreds of companies wishing to list will get permission to do so.
Beijing has also vowed to relax its tightly managed capital account and exchange-rate policy. Instead, it made its boldest move in years in currency markets when it devalued the yuan in August.
In perhaps the most significant shift, Beijing has dropped government-mandated interest rates charged and paid by banks. Despite the change, banks are often not allowed to set their own borrowing or lending costs without “window guidance” from the central bank.
Boosting lending has become increasingly important. Lending by Chinese banks fell by half in October from the month before, and a broader measure of credit fell by nearly two-thirds, according to government data.
The credit crunch in Wenzhou, which was caused by plummeting exports and falling property prices, has gotten worse even though Beijing has cut interest rates six times. The benchmark one-year rate is down to 4.35% from 6% a year ago. In Wenzhou, the official one-year composite private lending rate has risen to 17.14% from 16.34% a year ago.
“Those who borrow from us usually need the money to save their own business or lives. It’s not for investment or expansion,” said Fang Zhan, a private lending agent in a largely empty hall at the Wenzhou Private Lending Registration Center.
“Whether it’s a small factory owner who owes workers’ salaries or a candy shop guy with bad cash flows, there’s one thing in common—they can’t get money from banks,” said Mr. Zhan.
The problem isn’t only in Wenzhou. Sui Xin, chief financial officer of Hubei Goldberry Technology Co., which says it is China’s leading grower of organic raspberries, said her firm can’t get loans from banks because they don’t accept land as collateral.
“But land is our main asset and since we are an innovative business without precedents, banks are reluctant to lend us,” Ms. Sui said.
Mr. Zhou said as a government adviser, he has tried to boost the private sector but has been disappointed. “Under the current political system, it’s difficult to see deep and fundamental financial reforms,” Mr. Zhou said. “At the end of the day, it remains a state-dominated economy.”
Zhang Zhenyu, head of Wenzhou’s financial-affairs office, told the official China News Agency in March that Wenzhou’s financial reforms “are like Chinese traditional medicine.”
“Unlike Western medicine, which sees immediate effects, it takes time for Chinese medicine to work,” Mr. Zhang said.
Write to Shen Hong at hong.shen@wsj.com
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