China's Small Business Paradise Struggling

The collapse of the shadow banking system is just one of many headwinds facing businesses in the freewheeling area of Wenzhou.

Of the businesses that are doing well, expansion is impossible, loans only go to large, or well connected firms, and small businesses cannot get government permission to buy land to consolidate their production to a single facility. There is also a lack of online sales skills locally. And on top of it all labor costs and the Yuan are rising. In China, small business no longer booming

After years of easy loans and cheap labor, small-business owners in this prosperous coastal city of 9 million say they are facing strong headwinds: slowing export growth, rising worker costs and a drought of loans for anyone but the biggest businesses.

Whereas small businesses could once easily get loans from the city’s bustling “shadow banking” sector, a rash of defaults and suicides by debt-ridden businessman has caused the system to collapse.

“Shadow banking” here involved private lenders who illegally — though sometimes with government officials’ involvement — loaned money to small or medium-sized businesses at high interest rates. Many firms in Wenzhou used this underground financing because commercial banks typically loaned only to state-owned companies or huge corporations.