China's Wenzhou faces credit crunch as tycoons flee

Shanghai: The freewheeling Chinese city of Wenzhou is grappling with a credit crunch that has cut off the only source of funding for many private ventures and prompted dozens of debt-laden business owners to flee.

The southeastern coastal city issued notices this week ordering caps on interest rates for lending and warning loan sharks against using violence to collect debts. Banks have been ordered to do what they can to help support companies on the brink of collapse.

More than 20 owners of debt-swamped companies reportedly have fled, prompting local authorities to also order tighter controls for those leaving the country. The financial newspaper 21st Century Business Herald reported Friday that police had escorted some back to Wenzhou after they escaped to Hong Kong and Macau.

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Among those who allegedly fled is Hu Fulin, owner of Zhejiang Center Group, one of China’s biggest makers of eyeglasses.

While China’s leaders are still struggling with a flood of credit unleashed to ward off the shockwaves from the 2008 financial crisis, some areas are seeing what many here have dubbed a “drought” of funding.

Highway and railway projects are running short of cash, while some property developers are seeing their cash cushions dwindle after a prolonged effort by regulators to cool overheated investment and soaring prices in construction and real estate.

While similar problems with underground lending and bankruptcies are being reported elsewhere in China, Wenzhou’s have drawn special attention because of its reputation as a stronghold of private business.

Unlike other cities where state-run industries still dominate, the city has flourished since the 1980s as an enclave of entrepreneurialism, specializing in low-cost manufacturing of shoes, lighters and other light consumer products.

But China’s competitive advantage in such industries has been eroding due to rising costs, squeezing shrinking profit margins.

Chris Leung, an economist with DBS Bank in Singapore, said Wenzhou’s traditional reliance on high-interest lending, at rates of up to 90 percent a year, suggests many businesses were either making a “obscene level of returns” or had an evacuation plan already in mind.

“They are doomed to go bust,” he said in a comment issued Friday.

China’s mostly state-owned banks, which tend to shun smaller private borrowers, meanwhile have become even choosier after being ordered to raise their capital reserves to record high levels as part of the government’s effort to cool inflation.

State media report that about 80 percent of small companies use underground banking networks to raise cash, as interest rates have soared. Borrowers unable or unwilling to repay those debts have been disappearing, leaving the entire system vulnerable to collapse, according to some reports.

According to central bank figures, lending by underground networks totaled about 110 billion yuan ($17.2 billion) in July, up sharply from a year earlier.

In a notice posted on its website Thursday, the Wenzhou government limited maximum lending rates to 1.3 times the government’s benchmark rate of 6.56 percent. It also said banks must meet a target of 100 billion yuan ($15.6 billion) in new lending to small companies this year and “tilt credit toward small and medium-size companies.”

City authorities say they also are cracking down on “illegal detentions” - a euphemism for kidnappings - and other criminal acts for the sake of the city’s “social and financial order and stability.”

“Gangs involved in evil acts will face severe and quick criminal punishment according to law,” said another government notice.

AP