Wenzhou, China’s “City of Entrepreneurs”, facing unprecedented financial challenges; “Many entrepreneurs in Wenzhou are now counting their business career in terms of hours”

Wenzhou facing unprecedented financial challenges

Staff Reporter

2013-09-11

A series of issues including the collapse of the realty market and a disruption in the loan guarantee chain has pushed many enterprises in Wenzhou in eastern China’s Zhejiang province to the brink of bankruptcy. “Many entrepreneurs in Wenzhou are now counting their business career in terms of hours,” remarked Chen Dongqing, owner of a local home appliances retailer. In the city’s Leqing district, 15 mutual guarantee institutions, each consisting of 10 or even scores of enterprises, are reportedly on the verge of collapse due to the dire financial straits of their members.The crisis came to light in December last year when the Zhuangji Group confessed participation in chain financing involving over 30 billion yuan (US$4.9 billion) of banking guarantees and a dozen local enterprises, all of which were having difficulties maintaining normal operations.

One major factor behind the financial crisis overshadowing the local business community is a more than 30% plunge in realty prices across the city over the past two years. The price plunge is fatal for realty speculators, who have to bear high interest for loans used in their operations.

It has dealt a serious blow to the local manufacturing industry, with numerous factories in the fields of leather, footwear and steel closing down. Meanwhile, due to shrinking demand, rentals for stores on the avenue in front of Wenzhou’s railway station, which was once a bustling commercial area, have dropped by one third.

The current situation is also affecting family life for residents in Wenzhou. In July this year alone, 1,400 local couples divorced, a record high. The local court has also been inundated with financial dispute cases.

Insiders said that Wenzhou is the epitome of the China economic model and the birthplace of China’s private economy. It is now facing a series of problems, including a spiraling debt crisis, loan sharks, property bubbles, and a declining traditional industry, which are also being felt in other cities such as Ordos in Inner Mongolia.

Around 90% of the Wenzhou’s speculators have been affected by the current crisis and 80% of loans sharks are now broke, said a local businessman. Meanwhile, guarantee firms associated with loan sharks have been virtually wiped out. Six of the 10 vice chairman of the local guarantee industry association have been detained for engaging in the loan-shark business or illegal fundraising. The association originally had hundreds of members, however as of last year it only reported 40.

There is a consensus among local entrepreneurs that the city is now confronted with a crisis of unprecedented proportions, but they differ in how long it will take for the city to recover, with some estimating between three to ten years.