Wenzhou’s Case of The Disappearing Bosses

By LAN XINZHEN

Wenzhou’s Case of The Disappearing Bosses

By LAN XINZHEN

The boomtown of private economy has been plagued by company owners running away to avoid debt

Hu Fulin is one of China’s top businessmen in the eyeglasses industry. His Center Group, one of the country’s largest producers of eyeglasses, ranks frst in both output and export volume of sunglasses. As top tier as Hu’s business appears, Center Group’s operations are anything but sound.

Media fervor and public discontent erupted on September 20 after Hu left Center Group’s headquarters in Wenzhou, Zhejiang Province, on a business trip to the United States. Many feared he had “escaped” and would not be returning due to debt.

On September 21, some of Center Group’s employees and creditors swarmed the company’s office, demanding payment of salaries and debts. By September 25, the Administrative Committee of Ouhai Hi-Tech Area of Wenzhou, where Center Group is located, paid more than 9 million yuan ($1.41 million) in defaulted salaries for August and September for the 1,800 employees.

On October 10, Hu returned, calming fears that he was gone for good but admitting that Center Group was facing financial diffculties.

“Since the company has some problems of capital, I went to the United States to ask for help from my friends. Moreover, there are some receivable accounts from U.S. clients so I went to communicate with them for earlier payment of these debts,” Hu explained.

There is speculation that Hu came back to China after Wenzhou government offcials persuaded him with promises to help reorganize Center Group.

Whether the return was voluntary or coerced, the incident unveiled the predicament Wenzhou companies are facing. In Wenzhou, the cradle of the Chinese private economy, many companies must deal with huge debt burdens.

They quit

Last April saw the disappearance of three bosses in Wenzhou. Huang He, President of Wenzhou Jiangnan Leather Co. Ltd., left without notice; Yan Qin, boss of Wenzhou Portman Café, ran away, forcing the café’s chain to shutter its shops across the city; Chen Fucai, President of Wenzhou Sanqi Group, fed because of debt problems.

According to Xinhua News Agency, from April to the end of September 2011, at least 90 company owners in Wenzhou fed, causing their companies to close. Twentysix of those incidents occurred in September alone.

Bosses in Wenzhou are choosing to take to the road in large part due to heavy debt burdens—they cannot deal with creditors knocking at their doors. In late September, two bosses even committed suicide after being demanded to pay debts.

Most companies in Wenzhou are export-oriented. Since the yuan’s appreciation has increased this year, together with shrinking international demand and rising labor and raw material costs, the year has seen profts dwindle for most Chinese companies.

Zhang Zhenyu, Director of the Offce of Financial Work Leading Group of Wenzhou Municipal Government, said capital chains of many small and medium-sized enterprises (SMEs) are getting tighter, and the bankruptcy of one company will affect others, putting more strain on their capital chains.

“The heavier debt chains are wrapping private entrepreneurs like nets,” said Luo Zhongwei, Director of Small and Medium-Sized Enterprises Research Center affliated with the Chinese Academy of Social Sciences.

Pressure to borrow

Center Group once had a bank rating of A Level.

Hu once told the media that many bank heads in Wenzhou used to send greetings and gifts to him, often treating him to dinners and begging him to take out new loans. This helped foster Hu’s plan to invest in new projects.

At the end of 2008, Hu cooperated with Wenzhou Zhonggui Science and Technology Co. Ltd. to invest in the photovoltaic industry. According to the Center Group website, photovoltaic products are expected to reach 600 megawatts by the end of 2011 and the annual output value will be 7 billion yuan ($1.1 billion). Center Group has invested about 700 million yuan ($109.9 million) in the photovoltaic industry.

HAN CHUANHAO

Three years have passed but photovoltaic products haven’t brought returns to the group.

“In the past two years, solar energy has attracted a huge amount of capital, leading to surplus of production capacity,” said Yi Xiuxin, Director of Corporate Management Department of the Administrative Committee of Ouhai Hi-Tech Area. With the European sovereign debt crisis intensifying and the global economy in decline, the government no longer gives subsidies to the industry, causing prices of photovoltaic products to fall steeply. With the failed investment in new energy, repaying the loans has become Hu’s worst nightmare.

This year, the government tightened bank loans to deal with inflation. Hu had to borrow from private lenders with higher interest rates.

Several days after Hu left China, Center Group entrusted an accounting firm to liquidate its assets. The result showed that Center Group’s debt totaled 1.3 billion yuan ($204.08 million), including 300-400 million yuan ($47.1-62.79 million) in private loans, 60 million yuan ($9.42 million) of accounts payable to suppliers and 800-900 million yuan ($125.59-141.29 million) of bank loans.

Lu Ruqing, Deputy Director of the Administrative Committee of Ouhai Hi-Tech Area, said the incident at Center Group was touched off by a loan of 14 million yuan ($2.2 million). Unable to borrow money to pay back the loan, capital chains of the group ruptured.

In Wenzhou, many companies, mostly SMEs, are facing similar fnancial problems. For lack of necessary mortgages and warrantors, they cannot obtain enough loans from commercial banks and have to borrow from private lenders. Against the background of macro-control and tightened bank loans, private lending is at an all time high. In the frst half of this year, private lending totaled 48.55 billion yuan ($7.62 billion), with interest rates several times that of the bank rate.

Government rescue

The debt faced by SMEs in Wenzhou has drawn attention from government at various levels. On October 4, Premier Wen Jiabao held a meeting in Wenzhou to collect reports from Zhejiang Province and Wenzhou about SME development.

On October 7, the Zhejiang Provincial Government held a meeting requiring related government departments to solve problems for companies and prevent debt from further damaging businesses in the area.

Wenzhou was even swifter. On September 27 the city established a leading group on regulating the order of private lending and promoting economic transformation. The Wenzhou Municipal Government also sent 25 working groups to 25 city-level banking institutions, coordinating the banks to grant loans to SMEs. Various banks in Wenzhou also promised to lower interest rates and not to cut down on loans.

On October 9, the Wenzhou Municipal Government launched a package plan to rescue the SMEs. A temporary turnover fund of 200 million yuan ($31.4 million) for SMEs has been established. A similar fund established by the Wenzhou Council for Promotion of Small and Medium-Sized Enterprises has amounted to 900 million yuan ($141.29 million).

HAN CHUANHAO

A report fromChina Securities Journalsaid Zhejiang Province and Wenzhou City plan to apply to set up Wenzhou as a trial zone for comprehensive fnancial reform to expand financing channels and bring new impetus to the economic development of Wenzhou.

On October 12 Premier Wen Jiabao held a State Council meeting, pledging stronger fnancial and fscal support to small and micro enterprises. The State Council required commercial banks to strengthen lending to small and micro enterprises, especially those whose credit limits are below 5 million yuan ($785,000).

The meeting also required expansions to financing channels for small and micro enterprises, promising a greater issuance of collective banknotes, bonds and short-term papers and stable development of financing tools such as private equity and venture capital. The country will also promote construction of exchange markets and over-the-counter markets to improve the fnancing environment for small and micro enterprises.

Business in Wenzhou

Located in Zhejiang Province of southeast China, Wenzhou has the most

developed private economy in China.

After China adopted the policy of reform and opening up, the private economy in Wenzhou set many records in China: In 1980 it issued the first certificate for individually owned business; in 1984, the country’s first joint stock enterprise was established by 26 farmers; in 1986 China’s first joint stock urban credit cooperative was set up; in 1987 the city issued the country’s first local provisions on the administration of private enterprises.

Wenzhou’s private economy features in commodities of low technology and costs and worldwide market networks. The pattern of low cost and low profit is an important reason for China to be the world factory.

Today, Wenzhou’s leading industries include electric manufacturing, shoes and leather manufacturing, plastic product manufacturing and dressmaking. There are 35 national-level production bases, 170 famous trademarks of China and more than 40 products of Chinese famous brands.