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Credit Crunch Hits Hard In Wenzhou, China's 'Speculation Capital'

Economic difficulties in Europe and the United States may finally be landing to China. In Wenzhou, a mid-sized city near Shanghai, entrepreneurs are tightening their belts - and skipping town in some cases - as operating costs rise and loans become scarce

Harold Thibault

WENZHOU --The giant residences along the river are still there, and the rich here haven't stopped showing off their sports cars along the People's avenue. But don't be fooled: Wenzhou is facing tough times.

Known throughout China for its powerful businessmen and investors, this city of three million, located 250 kilometers south of Shanghai, is facing a crushing lack of liquidity.

A taxi driver, Mr. Xu, wants to set the world straight about Wenzhou's image as a rich city. It's a city with lots of regular people, he explains. And they're having a rough go of it right now. "Here, the rich speculate on everything, even on apricots. But if they have 10 empty apartments, we have nothing at all."

In the past couple of months, even the wealthy in Wenzhou have had troubles. They've been touched by the national credit crunch. The municipal police announced on Sept. 27 that the owner of a shoe company committed suicide, and that 29 other entrepreneurs fled the city. Those fleeing business owners were unable to repay loans they had contracted in the city's underground banking system, according to police.

This is partially due to Beijing's change in credit policies in fall 2010. The changes aimed to stem inflation, but also led to tightening of credit, especially in the real estate market. The central bank's interest rates have risen three times since the first of January. Commercial banks prefer to lend to large, public companies, which have implicit state support. They have far less interest in working with small or medium-sized private enterprises.

But ever since China's economic liberalization began, Wenzhou's specialty has been its development of the private sector. The city learned how to get by, in spite of being far from the central regions like Beijing, Shanghai and Canton that are favored by the central government for investment. Businesspeople borrowed money from private credit circles or invested in real estate collectively.

"These collective purchases allow businesspeople to negotiate from a position of strength and to make larger investments," says Gao Haoxiang, from the ‘real estate agency" of the daily paper "Wenzhou Evening." The local paper specializes in organizing these groups of investors through real estate classified ads.

Credit is drying up

Mr. Gao says the new rigor of credit requirements has only reinforced the underground finance system. "More and more loans are being made between private individuals, but the interests rates are much higher than bank loans," he says.

The costs of financing a business in Wenzhou have risen by up to 50% since 2010, according to the local Small Business Association. That has pushed some into bankruptcy. On Sept. 21, police had to stop a demonstration of creditors in front of the headquarters of Center Group, a bankrupt optical lens producer. The company owes approximately 150 million euros. Its director, Hu Fulin, has apparently left town.

Wenzhou is still considered a key city on the cutting edge of China's private sector. But the rest of the country frequently criticizes the city's investors for being too speculative. For example, they were extremely active in Shanghai's real estate market "because the prices were high there and everybody thought that it was a fruitful investment market," says Gao.

Wenzhou's chamber of commerce is registered all over China, even in the region of Aksu, in China's far north-west near the border with Kyrgyzstan.

The credit crunch is forcing investors to pull in their sails, or to start looking elsewhere. In August, a survey conducted by Wenzhou's primary chamber of commerce showed that 80% of its 40,000 members there thinking about reducing their investments in the real estate markets in Shanghai and Beijing, where prices have leveled off in the past couple of months.

Read the original article in French

Photo - Malcolm M

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