Waning Wenzhou?

Manufacturing hub shows signs of decline

Waning Wenzhou?

“Accumulating gold is not as good as storing up grain,” warns the Chinese proverb. The lesson is that it is better to work diligently than to take great risks in pursuit of wealth.

That won’t get many heads nodding in the city of Wenzhou, where the locals have a reputation for risk-taking endeavour.

Perhaps it is the city’s success that has brought a sliver of Schadenfreude to some of the commentary on its current commercial health. Where once the stories were of daring deals and overnight millionaires, today’s narrative is turning more introspective. The national newspapers are even asking whether Wenzhou’s best days are now behind it.

The problem is that Wenzhou has not invested in its long-term future, says Shanghai Securities News. Local businesses have treated their manufacturing operations as little more than financing platforms for speculation in areas like commodities and real estate. That has allowed some to build great fortunes. But Wenzhou itself is now hollowing out.

Even some of the fabled entrepreneurs have been running into trouble, reports the China Times. The bosses of two prominent local companies – a leather manufacturer and an electrical cable maker – were in the news this month for disappearing completely. A number of other entrepreneurs have run away too, often leaving large debts behind them.

The real issue, business owners complain, is that the banks won’t provide credit to smaller, privately-owned companies. (Wisely, perhaps: a China Times survey indicates that almost two thirds of Wenzhou companies polled were putting about a third of cash borrowed from the banks into real estate rather than into their core business).

That was also among the findings of a study conducted by the CBRC in May. Many of the firms now complaining of capital shortfall were looking for loans for speculative investment, and not for their underlying operations, the CBRC warned. As such, the banks were right not to offer credit.

But Zhou Dewen, chairman of the Wenzhou Council for the Promotion of Small and Medium-Sized Enterprises, says that capital will always chase the highest returns. Zhou also said that cash in Wenzhou is usually apportioned on a standard formula of one third for manufacturing, one third for real estate, and one third for private investment.

Meanwhile the municipal government has been talking about upgrading the local economy for a while, noting that raw material costs, export expenses and land usage fees were all on the rise, forcing many businesses to leave the city. Last year 2,000 enterprises closed down, the China Daily reports – more than half of them in manufacturing.

There is also a wider psychology at play in the debate, given Wenzhou’s status as the birthplace of private enterprise in modern China (see WiC63). Its relative isolation from the rest of Zhejiang province (screened by a range of nearby mountains) is said to have allowed an entrepreneurial spirit to develop, even under nominal Communist rule.

This buccaneering mentality meant Wenzhou was first to prosper as China inched back towards the market economy under Deng Xiaoping. By the early 1990s it had established itself as one of the first claimants to “world capital” status in the production of items like socks, footwear and cigarette lighters.

So is Wenzhou’s experience a case of first in, but first out too?

The local economy is in a period of transition, Zhou admits, and it will take time to move into a new era. Of course, this is the kind of switch envisaged in the State Council’s latest Five Year Plan.

Nor does Wenzhou’s experience sound much different to that of maturing economies elsewhere. Further to the south, Hong Kong and then Macau also started out as manufacturing bases. Both cities have since moved on to more profitable life, one as an international financial hub and the other as a global gaming capital.

Will Wenzhou, with all of its entrepreneurial heritage, now lead the first group of mainland Chinese cities on a similar journey, or might the city’s businessmen just leave instead, to look for greater returns elsewhere?

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