Neither a borrower nor a lender be

The Center Group, a major Wenzhou-based maker of spectacles, has been involved in a default incident as a result of the city's recent corporate cash-flow crunch. [Photo/China Daily]

New measures

 

"More measures will be carried out in the near future to provide SMEs with more efficient loans and more authorized lending companies and bank branches will be established especially to meet the demand from SMEs," said Yang Xiaoping, director of the Zhejiang branch of the China Banking Regulatory Commission (CBRC).

For SMEs, these rolling measures offer an opportunity for a rapid resolution of their troubles.

"We appreciate the recent visit of Premier Wen, who gave us great support and promised to solve the gray market lending problems of SMEs. That led to a series of measures from local government straight away," said Zhou Dewen, chairman of the Wenzhou SMEs Development Association.

The association has launched an emergency fund of 900 million yuan, most of which was donated by its members, to help private companies in urgent need of cash to sustain operations.

According to statistics provided by the Wenzhou municipal government, the amount of private capital in the city currently exceeds 600 billion yuan, with an annual growth rate of 14 percent over the past five years, including about 110 billion yuan from underground lenders.

Since the beginning of the year, the estimated annual interest rate has been rising, hitting a peak of more than 25 percent in September.

Since April, the increasing number of factory closures and absconding owners has severely affected the multi-billion-yuan gray market in Wenzhou and other cities in Zhejiang province.

More than 20 underground lenders have now closed down, leaving them with a total loss estimated at more than 5 billion yuan at the end of September. Experts have said the losses would have been higher if more of the gray lenders had gone under.

Top lenders and depositors really started to sit up and take notice of the collapse of Wenzhou's huge underground banking system after more than 90 companies closed down and some owners committed suicide.

"He owed about 210 million yuan in bank loans and another 200 million to private lenders by pledging 26 property ownership certificates from relatives and friends worth about 32 million yuan," said Lin Hai, a friend of a Wenzhou shoe manufacturer who committed suicide by leaping from the window of his 22nd floor apartment after failing to repay debts.

Lin said that a small number of shoe manufacturers became involved in underground lending activities after rising domestic inflation and costs forced the industry into a cycle of declining orders and production.

"The rising costs of raw materials and labor, coupled with the appreciation of the yuan and the higher tax burden faced by SMEs, have reduced corporate profits greatly," said Zhou of the Wenzhou SMEs Development Association.

However, the recent moves to improve the local situation have prompted a number of entrepreneurs to return to restructure their companies with the encouragement and suppor、、、、、、、、、、、、t of the local government.

Among the owners who absconded, Hu Fulin, the president of China's largest manufacturer of spectacles, the Wenzhou-based Center Group, was the biggest debtor and also one of the first to return to his hometown.

Hu fled to the United States on Sept 21, leaving up to 2 billion yuan in arrears, including 1.2 billion yuan in high-interest debt from underground banks.

"I came back to receive help from the government. I hope that my company can overcome the current difficulties with support and guidance from the local authorities," said Hu in an interview after his return on Monday.

Another errant executive, Sun Fucai, chairman of the board of Aomi Fluid Equipment Co Ltd, returned to Wenzhou on the same day.

Sun sold off all the equipment in his factory and disappeared on Sept 11, after sending his entire workforce on vacation to a scenic spot on the outskirts of the city. It later emerged that he owed 100 million yuan to official banks and informal moneylenders.

"I don't want to spend the rest of my life in the dark, so I chose to come back. I will be more cautious in maintaining cash flow if I resume operations," said Sun, whose company produced precision sanitation pumps, valves and pipe fittings.

The local government has provided strong support to help Sun's company obtain legitimate loans, protect his assets and get his business back on track.

Compared with the situation facing SMEs in Wenzhou, experts predict that companies located in the Yangtze River and Pearl River deltas will not be affected because they will have taken heed of the events in Wenzhou and gained experience.

"The majority of SMEs in the Pearl River Delta don't participate in private lending activities as frequently as Wenzhou businessmen, so they won't fall into the same traps. They've also learned enough lessons to avoid the risks in the future," said Zhou Qiren, a professor at Peking University's National School of Development, talking about the release of a report on the challenges facing SMEs in the Pearl River Delta.