Jiang Xiangsong has 18 days to pay a 2 million yuan ($314,000) bank debt or his suitcase company in eastern China will go bankrupt. He’s close to tears as he realizes his last hope, a government-backed office, won’t help.
“This is totally useless: If I had any collateral, why the hell would I come here?” he yells at an official in Wenzhou’s state-run loan service, set up to help small businesses after rising bankruptcies and suicides prompted Premier Wen Jiabao to visit in October and pledge support.
Wenzhou’s more than 400,000 businesses make everything from shoes in dusty side streets to synthetic leather in dilapidated factories, much of it financed by unregulated lenders that spread during China’s record 2009-10 credit boom. The decline of so-called shadow banking in the city, triggered by Wen’s move to rein in a national property bubble, has left Wenzhou bearing the brunt of the country’s economic slowdown.
China’s plans for a more targeted stimulus than the 4 trillion yuan package unveiled in 2008 ($586 billion at the time) mean Wenzhou may see little reprieve. Wen’s administration in March picked the city, five hours by train south of Shanghai, for a trial program designed to boost capital for private companies, an effort that’s failed to quell locals’ gloom.
“In previous years, it was difficult,” Chen Xijun, a director at the city’s Chamber of Commerce, said in a June 6 interview in the city. “This year it’s completely dark. We have no sense of direction where the economy is heading.”
In Wenzhou’s largest shoe market, 70-year-old Lin Yunlai agrees as he dozes in the booth he has run for two decades.
“This is the worst year,” he said as he waited for customers to buy sneakers from his half-empty shelves. “This place used to be packed with buyers from around the country, now it’s full of unsold shoes.”
Lin plans to sell his remaining 1,000 pairs and shut the business. The 70,000 yuan revenue he expects to make this year won’t cover his 160,000 yuan rent. “I’m done with it,” he said.
The first place to embrace private enterprise when China began opening in 1978, Wenzhou lured 2.8 million migrant workers over the decade following the country’s entry into the World Trade Organization in 2001. Seven out of 10 businesses in the city rely on exports, mostly in labor-intensive industries, leaving it vulnerable as Europe’s crisis crimps expansion.
China’s growth has slowed for five quarters, with gross domestic product rising 8.1 percent in January-to-March, the least in almost three years. While exports exceeded forecasts in May, the pace of gains eased to 9 percent so far this year, from 26 percent in the same period of 2011.
The central bank lowered interest rates for the first time since 2008 on June 7, and cut banks’ reserve ratios for the third time since late November. The yuan has fallen 1.2 percent against the dollar this year, trading at 6.3720 per dollar as of 9:54 a.m. in Shanghai today.
The economy’s downshift has been uneven. Guangdong, the largest exporting province and one that’s focused on upgrading production to higher-value goods, has seen resilience in its job market.
Stanley Lau, deputy chairman of the Federation of Hong Kong Industries, whose members have garment, watch, toy and footwear plants in Guangdong, said in an interview last week that most factories are still 5 percent to 10 percent short of workers or technicians.
Back in Wenzhou, a once bustling city center is in decline.
On a recent morning, a single coach pulled out of Wenzhou’s main long-haul bus station into an almost empty street. A few years ago, the road was a permanent traffic jam, clogged with buses and migrant workers arriving from other provinces, according to Liu, a taxi driver who like many people in China declined to give his full name.
On Wuma Street, the city’s most famous pedestrian shopping area, three sales staff wait idly for customers in a branch of the Red Dragonfly shoe chain. Posters advertising 40 percent discounts show the shop’s annual summer sale of leather sandals and high heels has started a month early.
Businesses are suffering because of weak demand, higher raw material costs and rising wages, as well as the breakdown in the system of unregulated money lenders who fund much of China’s enterprise, said Zhou Dewen, head of the Wenzhou Small- and Medium-size Enterprise Association.
“Wenzhou’s private lending system was built on trust, and now that trust is gone,” said Zhou. He estimates there is about 1 trillion yuan of idle private capital in the city because “nobody is willing to lend to others.”
As small businesses sought finance to expand, the city of 9 million became one of the nation’s biggest centers for shadow banks, unregulated lenders that demanded 21.6 percent on loans in April, compared with 7.6 percent from commercial banks, according to central bank figures.
Wenzhou had the worst non-performing loan ratio among the 21 cities tracked by Shenzhen Development Bank Co. last quarter. About 60 business owners fled the city in the first two months of the year to avoid paying their debts, China Business News reported. The exodus has continued, said Zhou.
The city was chosen by China’s cabinet in March for a trial program to broaden funding for private companies, including setting up the Wenzhou Private Lending Registration Service Center that rejected Jiang’s application. The office was designed to help control shadow lending by matching individuals holding excess capital with small businesses in need of funds.
“The Wenzhou reform is a worthwhile effort if it could succeed in overcoming long-standing obstacles for private capital to enter the state-controlled financial sector,” said Fred Hu, founder of Primavera Capital Group and former chairman for Greater China at Goldman Sachs Group Inc.
Since Wenzhou’s private lending service opened on April 26, 40 million yuan of deals have been done, one tenth of the amount of capital registered, said Chen at the Chamber of Commerce.
Suitcase exporter Jiang, 45, said that before last year he would have had no problem raising the 2 million yuan he needs with a few phone calls to friends and fellow businessmen. Now, nobody answers the phone. Last week, Jiang’s landlord refused to give him more time to make a payment on the 200,000 yuan rent for his factory because the landlord himself is short of cash after closing down his apparel business.
“Everyone around me is struggling,” said Jiang, whose company’s sales have dropped 60 percent this year.
Wenzhou’s growth moderated to a 5 percent pace last quarter, the weakest in at least four years. By comparison, Chongqing, where ousted party boss Bo Xilai championed state-led development, grew 14.4 percent, local government data show.
With the divergence in the degree of economic weakening, there’s been little sign policy makers will embrace the type of credit surge that saw 17.5 trillion yuan in new loans in 2009-10. The State Council in a May statement omitted any reference to expanding credit, and state-run Xinhua News Agency reported on May 29 there was no plan to introduce measures on a 2008 scale.
During the boom times in the last decade, Wenzhou drew migrant workers eager to take part in China’s economic growth. Now, the flood of labor has dried up and many are looking elsewhere for jobs in higher-technology industries that have been less affected by the slump, or simply plan to return home.
Liu the taxi driver, who came to Wenzhou more than 10 years ago, said he’s taking his family of four back to Anhui province next week. Even working more than 12 hours a day, his income has dropped to a monthly 3,000 yuan, from 5,000 yuan a year ago. Food takes half his earnings and he can only afford 400 yuan a month for a cramped apartment, he said.
“This is no longer the city I had dreamed of,” he said. “No matter how hard I work, I can’t save enough to buy an apartment here. I’m not coming back.”
Property in Wenzhou remains out of reach for thousands like Liu even after home prices slumped 12.3 percent in April, the fastest drop in the country. Apartments still cost an average 30,000 yuan per square meter -- the equivalent of the city’s annual per capita disposable income in 2010, according to the local government website.
Prices in Majestic Mansion, one of Wenzhou’s most expensive residential projects and developed by Greentown China Holdings Ltd., more than doubled to 70,000 yuan a square meter in the three years after its start in late 2007. Now the price is about 40,000 yuan, according to real estate broker SouFun Holdings Ltd. Soaring national property prices were one effect of the government’s stimulus plan in 2008.
At the government lending office in Wenzhou, Jiang leaves empty handed, worrying how he will tell his remaining 30 workers that he won’t be able to pay them.
“Once the workers are gone, there’s no way to restart the business even if the market picks up,” he said, his face buried in his hands. “All the big talk I heard on helping small businesses here is empty. The government is turning a blind eye.”