Two workers in a small electronic components factory running under capacity in Shifan county, Wenzhou. Local small- and medium-sized enterprises have had to borrow usury loans as banks have tightened the issuance of loans since 2008. Photo: CFP

On the evening of September 20, Ruan Changsong, a general manager with the sales department of Central Group, China’s largest eye glass manufacturer in Wenzhou, Zhejiang Province, made a routine phone call to the company’s chairman Hu Fulin but couldn’t reach him.

The next day, it was discovered Hu had escaped to the US to avoid the 2-billion-yuan ($313 million) debt the company had accrued, according to the Shanghai Morning Post.

Hu’s escape has highlighted a growing problem in the manufacturing hub of Wenzhou, where small- and medium-sized enterprises (SMEs) were forced to borrow money from private lenders with high interest rates as banks tightened the issuance of loans. The result was the suspension and bankruptcy of many SMEs after companies failed to pay back the money.

Chinese SMEs create 80 percent of the country’s jobs, but have difficulty securing bank loans, as major Chinese banks prefer to lend to larger companies, according to the Xinhua News Agency.

‘Pao Lu’

Hu was not the only one who had taken flight. It is estimated that 40 percent of SMEs in Wenzhou will have gone bankrupt or halted production by the end of this year, with some 50 SME owners running away to avoid debt. The phenomenon is referred to as Pao Lu in Chinese, or “run away from trouble,” Zhou Dewen, the head of the Wenzhou Small- and Medium-sized Enterprises Association, told the Shanghai Morning Post.

In one extreme case, it was reported an owner of a shoe company surnamed Shen in Wenzhou committed suicide for reasons thought to be related to high interest rates and private loans.

“Those small enterprises were not even counted, so the number of companies that went bankrupt or were suspended is even bigger,” Zhou said, according to the Beijing News.

“I have been calling for the local government to pay attention to the struggle of SMEs in Wenzhou since the beginning of this year, but these companies are mostly very small businesses, so it was pretty-well ignored,” Zhou said to the paper.

Massive private lending

For a long period of time, the export-oriented economy in Wenzhou has largely relied on labor-intensive industries. However, with the rising cost of labor, material and the appreciation of the Chinese currency, many enterprises have relocated and taken away a huge amount of capital, an analyst said.

At the same time, the government has gradually tightened bank loans since 2008 amid high inflation, forcing SMEs to turn to private lending, according to the Shanghai Morning Post.

The annual interest rate of private lending could be as high as 180 percent, Zhou was quoted by the Shanghai Morning Post as saying.

It was reported that of the 2 billion yuan Hu had borrowed, 1.2 billion yuan was from the private sector with a monthly interest rate of 200 million yuan. The rest was from the banks with a monthly interest rate of 5 million yuan.
In general, loans from private lenders have reached 110 billion yuan in Wenzhou, according to a report by the Wenzhou branch of the People’s Bank of China in July, which said that 89 percent of households and individuals and 59 percent of enterprises in the city are involved in private lending.

“The small commodity businesses in Wenzhou including lighters, eye glasses, leather and garments do not make any profit, so people open other businesses,” Qiu Shizhi, a lawyer with the Zhejiang Shidai Commercial Law Firm, said to the Beijing News.

Qiu said companies that have actual properties, like factory buildings, can get loans from the banks much more easily. They would then lend the money out at a higher interest. Also, Qiu added those who have no capital would raise the money before lending.

Even for those who can successfully get loans from banks, the high interest rate is still a challenge. Wang Chonghuan, chairman of the Wenzhou-based Topsun Group, an investment company, said that the biggest challenge his company faces is high bank interest.

“The bank interest rate for companies has reached 15-20 percent, but the average profit rate for a company is only 10 percent, making it impossible to pay back the loan even with all the profits,” Wang said, according to the Beijing News.

Favorable policies

The situation of SMEs in Wenzhou has drawn the attention of Chinese leaders. On Tuesday, Premier Wen Jiabao took a trip to Wenzhou. He urged stronger financial support for China’s small businesses.

Wen said that small enterprises should be a priority for bank and credit support and enjoy more preferential tax policies. 

Wen also said banks should increase their tolerance for the non-performing loan ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit.

The local government had introduced a series of policies including lowering the bank interest rate to help SMEs get through their difficulties.