Pilot Lending Program in Wenzhou Falling Short

Worst of Chinese Slowdown Seen in Wenzhou as Stimulus Limited 

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.

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.

I don't know about that particular cause and effect. The shadow lending bubble could have collapsed on its own. It is all mixed up with property, which was being liquidated to pay business debts.

"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."

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.

All of this investment has been toward the goal of assimilating the Chinese peasant into the modern urban world. A reversal was not planned for.

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."

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.