Neither a borrower nor a lender be

Wenzhou, usually renowned for its booming private economy, has seen many of its enterprises trapped in serious cash flow problems that have aroused the attention of the nation's top leadership. [Photo/ China Daily]

 

The collapse of "gray" banking in Wenzhou has hit local businesses

WENZHOU, Zhejiang - Premier Wen Jiabao paid a rare visit to Wenzhou, a typical boomtown in eastern Zhejiang province, during the National Day holidays. He was accompanied by a team of senior treasury officials, including the Finance Minister Xie Xuren and the Governor of the People's Bank of China, Zhou Xiaochuan.

Wenzhou has nothing to offer in terms of amenities, so these luminaries didn't go there to seek temporary relief from the heavy burdens of state. Instead, they traveled to the city to address what has recently become a huge headache for the manufacturing powerhouse.

The high-level visit served as a reminder that a localized credit crisis in Wenzhou is threatening to escalate into a national issue. Similar problems, on a lesser scale, are known to be troubling China's other manufacturing hubs, including cities in the Yangtze River Delta and the Pearl River Delta.

Since Wen's visit, the local and provincial governments have introduced a raft of measures with the intention of containing the crisis. At the core of their efforts is the establishment of a bailout plan, amounting to an estimated 100 billion yuan ($15 billion), to help insolvent entrepreneurs repay high-interest loans taken out with underground lenders.

In recent weeks, the local government has maneuvered behind the scenes to persuade banks and the credit middlemen, called underwriters, to be more sympathetic in their dealings with cash-strapped clients and, if necessary, to provide them with loans at favorable terms.

"We've put together a group of 48 underwriting companies to provide money and corporate services to small and medium-sized enterprises (SMEs) with lower interest rates and commission fees," said Yu Zhongping, director of the Wenzhou Economic and Information Commission.

Yu added that more measures will be introduced to monitor and control the risk of a collapse of the gray, or underground, money market that has become a major source of funding for many SMEs.

The municipal government has also organized teams of officials to work with 25 banks to conduct a thorough study of the nature and extent of the credit crisis that has already driven more than 90 factories out of business. The collapse has resulted in a number of factory owners absconding with whatever money and assets they could haul, leaving behind empty buildings and thousands of unpaid workers. In some extreme cases, the owners have committed suicide.

To help dissuade bankrupt borrowers from absconding or even taking their own lives, the city government has established a team of financial and corporate experts to assist in the restructuring of debts and operations of insolvent enterprises. So far, at least three fugitive entrepreneurs have returned to Wenzhou to cooperate with the government in rebuilding their businesses.

What's more, banks in the city, including the local branches of the State-owned banks, have agreed to extend credit to financially troubled enterprises to help them overcome cash flow problems.

As the major commercial lender based in the city, Bank of Wenzhou Co Ltd has increased its loans ratio in the area to 60 percent from 40 percent to increase the funds available to business.

"If we receive permission from the central bank to increase the debt limit, our bank will definitely implement those new limits in Wenzhou as a priority," said Wu Hua, president of Bank of Wenzhou.

"We are offering tailor-made loans to solve the specific credit problems facing individual enterprises," he added.

Meanwhile, to meet the demand from SMEs, the Wenzhou branch of Bank of Ningbo Co Ltd has also increased the ceiling for the amount available for individual loans, adding 100 million yuan to the previous lending limit.

Meanwhile, other banks are chipping in with offers of credit at favorable terms. "Bank of China will help SMEs by providing lower rates of interest on loans and with preferential measures for those enterprises facing extreme difficulties in cash-flow management," said Tao Lingfu, president of the Wenzhou branch of Bank of China Co Ltd.

Earlier this month, the provincial government also moved to help SMEs by establishing measures to assist potential enterprises with a greater number of loans, and to ensure that fewer companies are shut down because of financial problems.