Chinese credit squeeze sparks crisis for entrepreneurs

 

THE RICH eastern city of Wenzhou, the cradle of capitalism in China, is battling its own economic crisis as local industry struggles under tighter lending conditions, with some bosses resorting to loan sharks.

Two shoe factory bosses have taken their own lives and about 10 local business owners have fled the city in eastern China, leaving thousands of employees in a state of shock and enormous unpaid loans of hundreds of millions of yuan.

The crisis was brought about by tighter lending conditions and most of the troubled firms are in the manufacturing sector.

“Business is not good at the moment, people borrowed money at 17 to 18 per cent, made some money then put it into repaying the interest. Or bought a house, or lent the money again,” said one Wenzhou businessman, who gave his surname as Zeng.

“I don’t know what they were thinking. The business of borrowing money like this and then spending so much is not stable. The problem is that investing in property these days is too risky, and the European and American markets are very weak,” said Mr Zeng.

One of those who died was the owner of the shoemaking firm Zhengdeli, who jumped from his 22-storey apartment building on Tuesday. Shoes are big business in Wenzhou – 40 per cent of the world’s total are made here, along with one third of the world’s sunglasses, nearly all the world’s cigarette lighters and a panoply of other goods.

Hu Fulin’s Zhejiang Center group had 3,000 employees and produced 20 million pairs of sunglasses every year. He expanded into property and solar energy, but has now fled owing millions to suppliers and in unpaid wages.

Another Wenzhou business owner, Zheng Zhuju, has been in police custody since September 13th. Ms Zheng’s home appliances shop allegedly owes 280 million yuan (€32 million) to private lenders and banks, and she tried to flee the city with millions in cash.

China’s economy is growing strongly but since last year, China’s central bank has been tightening monetary policy by introducing controls on credit to stop runaway inflation. These banks have suddenly become reluctant to offer loans to small firms like those in Wenzhou for fear they will default.

By shutting off bank credit channels, some entrepreneurs have turned to private lenders, many of them loan sharks with links to illegal crime groups, even though the rates are exorbitant. Most of the runaway bosses are in the manufacturing industry, the National Business Dailyreported, and each of them had borrowed hundreds of millions of yuan from banks and private creditors.

Money from government officials was involved in many cases of illegal loans to business owners who are now fleeing after finding they are unable to pay back the money, the Xinhua news agency reported. Zhou Dewen, head of the Wenzhou business association, said firms were borrowing money at 8 per cent interest, even though profit margins were only 3 to 5 per cent.

“I said last year that if the policies were not adjusted by Spring Festival, then 40 per cent of Wenzhou businesses could fail. And since then the rot has accelerated,” said Mr Zhou.