By Ye Jingyu (叶静宇)
Nation, page 9
Issue No. 552, Jan 9, 2012
Translated by Zhu Na
Original Article: [Chinese] 

Wenzhou, the city synonymous with Chinese entrepreneurship, has been rocked by a breakdown of trust that has cut off factory owners from the friends and relatives who financed their businesses. 

The first two days of 2012 didn’t go well for Lin Jianhai (林建海), who runs a leather factory in Wenzhou. Lin was on the phone continuously, calling dozens of private lending agencies, but always getting the same response: no money.

One of those he called was Fang Peilin (方培林), the founder of China’s first underground bank (私人钱庄) and one of the principle figures in the city’s private lending circles. Not long ago, Fang would have been able to pull together 10 million yuan in a couple of phone calls, but not anymore.

“Wenzhou’s private lending has dried up. It has never been like this in the 30 years since China’s reform and opening-up,” said Fang.

The veteran lender says that businesses still need cash urgently, but none of the private creditors are willing to lend. After 27 years raising funds for Wenzhou’s bosses, Feng’s own business has been almost inactive since September.

Wenzhou’s network of trust and reputation – the system on which its economic model rests – has been destroyed by the private lending crisis.

Suppliers are now requiring Wenzhou’s entrepreneurs to pay in advance and Fang says it will take at least two years for the businesses to rebuild credibility and confidence. Others estimate five or more, while some academics think the city's trust-based way of doing business must be replaced by modern practices rooted in law.

After a series of national reports about the owners of small and medium-sized businesses who had disappeared, it was suggested that the situation had improved since the end of October, but in fact has remained bleak.

Local newspapers have continued to carry reports on bosses killing themselves or running away since November. In one week alone - Nov 8 to No 13 – one man leapt from a high-rise, another jumped into a river and two gave themselves lethal injections.

The number of reported disappearances grew from 93 in October to more than 140 at the end of the year, but now the people going missing seem to be mainly the owners of private lending agencies, instead of the indebted entrepreneurs who led the first wave of runaways.  

As well as small-scale lending companies, Wenzhou has more than a thousand investment companies, credit guarantee companies and other similar substitutes for banks, taking deposits and making loans.

Credit guarantee companies, which act as intermediaries between banks and small borrowers, have underwritten more than 10 billion yuan worth of loans, says Guo Binchao (郭炳钞), the president of Wenzhou Credit Guarantee Association.

Faced with a breakdown in the funding chain, the government has taken a number of emergency steps. However, these policies have been weak, and they’ve done little to moderate the crisis.

One Wenzhou government official said that the measures gave support to small and very small businesses, but added that these firms could continue to face difficulties in the first quarter of 2012.

 
As for Wenzhou’s private lending, Fang, says that the industry needs to take major steps to improve transparency and standardization.  

The breakdown in trust has left Wenzhou’s borrowers in the cold. Lin, the leather factory owner, needed to repay a 10 million yuan loan at the end of 2011 as well as making a 30 percent down payment for a 20 million yuan order of raw materials. After a two months search, he could only scrape together 3 million yuan.

“It used to be easy to raise 10 million yuan at this time of year, but this year has made me anxious and turned my hair grey,” he said.

The problem, Fang says, isn’t that a shortage of money, it’s the widespread sense that the risks from lending it out are too great.

That growing caution comes from talking to people like Chen Bailin (陈百霖), the owner of an electric appliance dealer, who made a one-year loan of a million yuan to a friend in June 2010. A year later, when the loan was due, Chen discovered that his friend had passed the cash on to the owner of a private lending agency who had disappeared.

Chen finally recovered his million yuan, without interest, in November and now says that the only people he would lend to are friends and family needing to pay for houses, weddings or medical treatment.

The collapse in trust has done damage to businesses beyond its effects on private lending, with the Wenzhou Council for Promotion of Small & Medium-sized Enterprises saying that 89 percent of firms that it surveyed had dealt with people failing to respect contracts.

In these circumstances, it would have been almost unimaginable for Lin to start out. The leather maker Lin recalls how, years ago, he got together 90,000 yuan by himself and borrowed 30,000 yuan at high interests to start his factory.

“I asked around one night, then the next morning my neighbor sent the money over without signing any contract, even the interest was only agreed orally.”

Nor did he have to sign contracts for any of his subsequent loans from friends and relatives. 

“For the biggest amount I ever borrowed- 12 million yuan from one of my relatives in Shanghai - I only made a phone call, then the money was transferred.” However, this kind of time has gone forever.

Wenzhou’s entrepreneurs are now facing sluggish overseas demand, moderate domestic demand, exchange rate fluctuations and high inflation.

The city’s factories have seen a slump in orders for the low-tech, labor-intensive products that they manufacture, while raw materials and salaries have grown.

Their owners say that profit margins are 10 percent for domestic orders and 5 percent for exported ones, which isn’t enough to cover interest payments, while they complain, through the Wenzhou SME Association, that they are being taxed at 40 percent and charged countless fees.