China's debt-heavy bosses go on the run
By Olivia Chung
HONG KONG - A lending crisis is brewing in the eastern Chinese province of Zhejiang, after more than 20 company bosses have fled in recent weeks, leaving
millions of dollars in unpaid loans linked to unofficial lenders, many of whom
who get their cash from ordinary families.
Three of the runaway company heads each left more than 1 billion yuan (US$156
million) in loans unpaid, according to Zhou Dewen, chairman of the Wenzhou SME
(small and medium-sized enterprise) Development Association. Among the
absconders are a few recognized industry leaders such as Hu Fulin, 47, founder
and president of the Zhejiang Center Group, one of the mainland's biggest
spectacles makers.
Businessmen have been forced to turn to private lenders for help in the wake of
tighter central government loan policies introduced late last year to fight
inflation. The higher interest rates that are demanded by the underground
lenders can become particularly onerous when the businesses do not run as well
as expected.
Most of the company heads who have absconded were involved in manufacturing and
had borrowed hundreds of millions of yuan from banks and private creditors.
Wenzhou has about 360,000 small and medium-sized enterprises, producing a wide
range of consumer goods - from shoes, cigarette lighters to spectacles - whose
low cost has helped to make China the world's workshop.
Last Wednesday, Hu called the company's chief executive officer to say that he
was unable to sustain the company any longer. He is now believed to be in the
United States, according to the 21st Century Business Herald.
Hu's company was up to 2 billion yuan in debt, including 1.2 billion yuan from
private lenders that attracted interest rates of more than 20 million yuan a
month, and 800 million yuan at interest of more than 5 million yuan month, 21st
Century Business Herald reported, citing an unidentified source.
Zhejiang Center Group, founded in 1993, employs 3,000 people and produces 20
million pairs of glasses a year. Hu is also involved in the real estate and
solar power industries. He owes a total of 10 million yuan in employees' salary
for their work in August and September.
Wenzhou businesswoman Zheng Zhuju was not so fleet-footed - she has been in
police custody since the middle of this month on charges of running illegal
business operations. Zheng, who owes 280 million yuan to private lenders and
banks, had attempted to flee Wenzhou with hundreds of millions of yuan in cash,
Shanghai Daily reported, citing local police.
Zheng, 49, ran a home appliance store chain and was the official licensee to
sell products under the brand names of Siemens, Sony, LG and domestic brands
Midea and Haier.
The difficulty of borrowing money from banks, allied to rising production and
labor costs, is threatening the survival of many SMEs, prompting many to turn
to private lending despite the high interest rates, said Zhou of the SME
Development Association.
"Many SMEs have turned to private sources and even loan sharks, who charge up
to 180% annual interest. However, most of the SMEs' profit is less than 10%, so
borrowing from loan sharks would amount to 'attempted suicide'," said Zhou.
Since the beginning of April, many SME owners have disappeared after failing to
pay back money they'd borrowed from underground banks. Among them is Huang He,
the chairman of Wenzhou Jiangnan Leather Co Ltd. Huang closed down his factory
without warning in April, owing billions of yuan to workers and money lenders,
a spokesman for the Longwan district economic development zone (EZD) in Wenzhou
confirmed to Asia Times Online.
In July, Jubang Shoes Industry Co Ltd, run by Wang Hexia, unexpectedly ceased
production, owing 100 million yuan to creditors, the EZD spokesman said. Just a
month ago, Ye Jianle, boss of Wenzhou-based Zhejiang Tianshe Electronics Co,
was also reported to have gone to ground after failing to pay 70 million yuan.
Wenzhou Shoes Material Co ceased production suddenly on August 29. There has
been speculation in the mainland media that he is in trouble with an
underwriting company.
"All those businessmen had been involved in borrowing money from underground
banks and they failed to return the money on time given the increasing
interest," Xu Liangxi, deputy director of the Wenzhou Marketing Management
Association, told Asia Times Online. "But the shame is such cashflow problems
have suffocated the firms that have been in operation for 10 to 20 years."
Private lending in Wenzhou has been booming since the country started monetary
tightening late last year to fight inflation. The central bank has raised
interest rates three times this year, taking the one-year benchmark deposit
rate to 3.5% and the one-year lending rate to 6.56%. The bank has increased the
reserve-requirement ratio for commercial lenders six times, pushing the ratio
for major banks at a record 21.5%, and 19.5% for smaller ones 19.5%.
Yet as defaults by borrowers in the underground market mount, private money
lenders are wary of the increasing risk of lending money to SMEs.
"The collapse of the underground banks would be the worst consequence for the
private money lenders and borrowers in Wenzhou. Many ordinary people lend money
to private money lenders," said Chen Gongmeng, chairman of Wenzhou Strategic
Investors Federation.
Chen asked for the state-owned bank loans policy to be loosened so that more
money can be lent to SMEs at lower interest rates than those offered by the
gray-market lenders.
In July, Wenzhou's underground banks processed 110 billion yuan, up about 40%
from the 80 billion yuan processed in the same month a year earlier and equal
to more than one-third of the city's entire 2010 GDP of 292.56 billion yuan,
according to the Wenzhou branch of the People's Bank of China.
About 89% of families or individuals in the city and about 57% of enterprises
had either borrowed from or made deposits to non-bank finance companies in last
year's second quarter, the most recent figures available from the People's Bank
of China.
Since Monday, workers at Hu's Zhejiang Center Group have been getting their
unpaid salaries with the help of a workforce set up by the local government. a
spokesman of the Ouhai district economic development zone in Wenzhou said,
while declining to say where the money was from.
China Daily on Friday quoted unidentified government sources as saying a
financial task force has been sent to probe private lending in Wenzhou.
Olivia Chung is a senior Asia Times Online reporter.
(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
