The Wenzhou run worsens

I’ve written before about how, as China’s monetary policy tightened, credit from the formal banking system has become difficult for some companies, particularly for the small to medium sized businesses.  As a result, these companies are increasingly relying on underground credit, which includes things like loan sharks and pawnshops.  These underground banking system usually charge very high interest rates (in the order of tens of percentage points per annum), which are quite unsustainable. With high interest rates and potentially questionable credit quality, I have been expecting problems.

Recently they started to surface, and some of these business owners fled.  In a previous post, I described the situation in Wenzhou, where even selling off real estate wasn’t enough to help some business owners financial situation. Now, more problems are surfacing in Wenzhou. Two recent stories tell the tale.

A few days ago, the Shanghai Daily ran with a story with the title “Subprime crisis sweeps Wenzhou as bankrupt bosses flee”:

The east China city of Wenzhou is battling its own subprime crisis after seven local business owners fled recently, leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan.

Most of the runaway bosses who have disappeared since September 12 are in the manufacturing industry, according to today’s National Business Daily. Each of them had borrowed hundreds of millions of yuan from banks and private creditors.

Today, Sina ran a story about another nine business owners that fled their debts on 22 September.  The story also highlighted that bank deposits are shrinking as depositors are attracted by the higher rates of interests that the underground banking system is able to offer.

Businesses in Wenzhou are facing unprecedented challenges, with rising costs and slowing economic activity impacting their cash flow cycle.  Waves of bankruptcies are happening, and business owners are running away.

With unbearably high interest rates charged on borrowers and questionable credit quality, the development is not reassuring.

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Comments

  1. Unregulated sub-prime loans at 60%? And these creditors even take deposits? What could go wrong? And that’s just one of the problems there.

    High inflation and a real estate bubble are toxic for social stability and growth.

    I wonder how exactly China plans on growing at +8% with all these problems brewing. Their real estate bubble is just a bomb waiting to go off. Any celebration of prices going higher is foolish as it simply means more people have loaded up on more debt and price have a longer way to fall.

  2. I am sure most of you are familiar with the Chinese “copper loan”
    phenomenon, where smaller businesses excluded from bank
    finance would import copper, which they COULD finance via the
    state, and then use it as collateral for private loans outside the
    banking system. This was great when copper was rising or stable: now, not so much!

  3. Where did those businesses owners go? Did they come to Australia? Did they bring hundreds of millions with them? Come and buy my IPs please!

  4. Here comes the sun, here comes the sun,
    and I say it’s all right

    Little darling, it’s been a long cold lonely winter
    Little darling, it feels like years since it’s been here
    Here comes the sun, here comes the sun
    and I say it’s all right

    Little darling, the smiles returning to the faces
    Little darling, it seems like years since it’s been here
    Here comes the sun, here comes the sun
    and I say it’s all right

    Sun, sun, sun, here it comes…

    http://globaleconomicanalysis.blogspot.com/2011/09/cash-crunch-in-china-picks-up-momentum.html

    Pooo, better watch my Gold short 😉

  5. Spent 3 months in Wenzhou playing rock guitar in 1997. Most of my time on the XingXiWu Jiubu (Friday’s Bar) on the WuMa JieKou (Five Horse Street) for those familiar with the area. Not sure anyone else has similar Wenzhou street-cred. Happy to hear from you, if so. Great place. There were only 7 white foreigners in the town when I was there.

    That’s not to say there weren’t plenty of people with international passports. Most of the Chinese in 13th arrondisement in Paris are from Wenzhou.

    Anyway, I reckon DongTou Island property still worth a look for those in look for a bargain. There was an Australian designed catamaran that took us out there. Great seafood. Still trying to reach out to the old gang to find out what prices are doing but if you are looking for a quiet location in China with mountains and sea views (you shan, you shui), then you can’t go past it.

    Oh, DongTou Island is an old Chinese pirate hangout, but don’t let that bother you. There used to be convicts in Sydney many moons ago too.