Glasses half full

Government introduces measures to control Wenzhou’s debt crisis

Glasses half full

Runaway boss returns: Hu Fulin

When Hu Fulin disappeared last month, it looked as though he might become the poster boy of Wenzhou’s runaway bosses. The so-called “King of Glasses” fled the country after racking up approximately Rmb2 billion ($312 million) of debt, leaving his eyewear firm at the mercy of angry creditors (for more on this story, see WiC124).

But it looks as though Hu might be trying to reinvent himself as the prodigal son.

Just as soon as locals had decided that they would never see him again, Hu was suddenly back in Wenzhou. His abrupt departure was actually a trip to the US to seek financial help, explained 21CN Business Herald, and not an attempt flee. His factory remains closed but Hu is working to restructure his debt.

Local officials will be hoping that Hu’s return will make him a role model for other bosses that have absconded. Estimates vary but China Securities Journal suggests that the owners of at least 90 other businesses have done a runner, and that doesn’t include many smaller business owners.

Many of these businessmen owe money to private lenders outside of the established financial system, and their absence jeopardises complex chains of debt, threatening crisis in the shadow banking system. Some believe that the chaos could also spill over to the broader economy. The Financial Times this week cited a central bank estimate that the underground banking sector had grown to Rmb4 trillion ($627 billion), which is about 8% of the size of formal lending. If so, that’s big.

In order to restore confidence, the Wenzhou government has introduced a series of measures designed to help smaller factories, demanding that banks meet their annual Rmb100 billion lending quota to small and medium-sized businesses. It has also said they must lend at no more than 1.3 times central bank benchmark rates.

“All local banks must proactively seek lending quotas from more senior levels of their organisations… and tilt credit towards small and medium-sized companies,” the city government said on its website.

The local government has also negotiated with underwriters, the businesses who guarantee private debt, to take a more lenient attitude towards their debtors. It has already succeeded in bringing together a group of 48 underwriters that will lend money to small and medium-sized companies at a lower interest rate.

And to show that Wenzhou’s problems are not just a local concern, Beijing has dispatched a senior team to show support. Premier Wen Jiabao, along with central bank head Zhou Xiaochuan, and finance minister, Xie Xuren, interrupted their National Week holiday to check up on the situation.

Will that stem the rising sense of panic in the city? Some analysts have estimated that outstanding debt in Wenzhou could have reached Rmb1 trillion, of which 10% to 15% is expected to default. This bad debt would far exceed the Rmb100 billion that the banks have been ordered to lend to local companies. And since much of the money lent out by private lenders originated in the official financial sector, private debt defaults could cause problems for the banks too.

Living up to the city’s entrepreneurial reputation, Wenzhou’s officials are trying to make the best out of a bad situation. The local government has already sent a proposal to the Zhejiang provincial government outlining a plan to make the city into a pilot zone for special financing services that cater to small and medium-sized companies. The Shanghai Securities News says the plan includes the establishment of 24 ‘private loan centres’ where debtors and private lenders can document their transactions. This would be highly significant as it would legalise private loans, and offer a first step towards interest rates being determined by markets.

Whether the proposal is accepted or not remains to be seen.

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