Wenzhou woes

The big four banks have seen big withdrawals in recents weeks

Bad debts are putting pressure on China’s shadow banking industry. One of Wenzhou’s more prominent businessmen, Hu Fulin was unofficially known as the “King of Glasses”. The chairman of Zhejiang Xintai Group, a leading eyewear manufacturer, had official titles as well, including an award that congratulated him as a “Superior Builder of Socialism”.

Despite the accolade, he will probably be remembered more as someone who absconded when his debts overwhelmed him.

Early last week, Hu’s company was busy preparing to sign a contract with a large Hong Kong partner. Then Hu called into the office from an unknown location. Pay the staff their wages, he instructed. Plus don’t expect to see me again – I will never be coming back to Wenzhou.

When the news of Hu’s disappearance leaked out, the company was soon besieged by creditors demanding their debts repaid.

The Economic Observer reports that Hu owed about Rmb2 billion ($312 million) worth of debt. But people close to the situation told the newspaper that Hu had borrowed even more than that from (reckless) individuals, and it was probably enough to force several private lenders out of business.

Wenzhou is at the forefront of a shadow banking industry that lent Rmb287.5 billion in the first half of the year, more than double the amount in the same period last year. These are the estimates from government sources: the actual scale of the lending is likely to be much, much larger.

How can a more accurate assessment be reached? In the first half of September, deposits at the Big Four banks decreased by Rmb420 billion, an unusual level of withdrawals, reports China Securities Journal. Some analysts now speculate that savers – fed up with low returns on bank deposits – are switching their savings to private financing companies instead. The decrease in deposits were greatest in cities like Wenzhou, Dongguan and Fuzhou – or manufacturing centres where private lenders thrive.

Private lenders are offering attractive returns: the monthly interest rate from a private financing company is between 2% and 3%, around 10 times more than the monthly return on one-year deposits at the bank.

The problem is that the ranks of disappearing debtors have been growing (a subject these pages have regularly chronicled, see WiC114 and 120). While an established (and legal) bank might be large enough to absorb the losses that come from bad debt, the private lenders are much smaller, and hence more vulnerable to collapse if one of their large borrowers heads for the hills.

The web-like character of this underground credit system also means interconnected chains of debt: one party lends to another at a monthly interest rate of 3%, who in turn lends the proceeds to someone else for 4%, and so on. When one party fails to pay up, the chain collapses.

Demand for financing is such that some bosses are shifting their attention away from their core business into private lending, with the original business becoming a front for a financing operation.

The 21CN Business Herald carries a story about a Mr Wu, a Wenzhou manufacturer who shrank his manufacturing business to free up Rmb3 million of capital to lend to a friend engaged in private lending at what was supposed to be a high interest rate. But the friend is now paying lower returns than promised and refuses to pay back the money owed. Wu now fears that he will be caught in a collapsing chain of capital. People he once did business with are starting to disappear.

“People with problems seem to be getting closer to me. I am at a complete loss on what to do,” Wu laments.

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