Wenzhou Failures Prompt Comparison to Lehman
The number of failing businesses and owners fleeing creditors have sparked speculation that Wenzhou may become China’s Lehman Brothers. Until recently Wenzhou was considered the city that best embodies the aggressive, outward-looking entrepreneurial spirit behind China’s economic miracle.
During the past year dozens of prominent Wenzhou firms have failed and struggling owners have been turning to high-interest private lending to keep factories open. During the first nine months of 2011 at least 228 entrepreneurs are known to have fled eastern Zhejiang province, mostly from Wenzhou. One day in September eight Wenzhou bosses fled an army of creditors.
Fugitive bosses and shuttered factories have led to loss of jobs for workers and loss of capital for creditors, prompting media speculation as to where the “Wenzhou loan crisis” will lead. The city government has asked banks to make more unsecured loans to small and medium enterprises and help support their efforts at restructuring out of the crisis. Some want an outright government bailout.
During the past decade the “Wenzhou model” has transformed from export-driven to speculation-driven, leading to high housing prices and inflation, says economist Han Zhiguo.
“Using taxpayers’ money to rescue those gamblers in Wenzhou involves a high moral hazard,” he wrote in his blog.
Some analysts argue that with or without a government bailout Wenzhou has become China’s Lehman Brothers and will have a profoundly negative impact on China’s economic climate.
Helping entrepreneurs who have fled the consequences of their speculation will only aggravate the problem, says economist Chen Chunzai, vice chairman of the Zhejiang Chamber of Commerce in Beijing. He argues that the government should focus on helping those businesses that have hope of surviving.
“Essentially, this is still only an individual phenomenon,” he said.
Chemical firm chairman Huang Qiwu agrees.
“Bosses who run have often neglected their core business,” he says. “Honest entrepreneurs won’t borrow high-interest loans from private lenders.”