Wenzhou's woes are a sign of things to come if essential reforms are ignored
Hu Shuli says the fiasco in Zhejiang reflects a deeper malaise in the
economy resulting from market barriers for the private sector and
curbs on alternative financing
Oct 20, 2011 [South China Morning Post]
Recent news that scores of business owners in Wenzhou had fled or gone
into hiding after their business failed for lack of credit set alarm
bells ringing. Premier Wen Jiabao himself visited the city, for so
long a cradle of private enterprise, and on October 12 chaired a State
Council meeting on developing more appropriate financing policies and
other relief measures for small and medium-sized enterprises.
Zhejiang province also introduced initiatives recently to improve
financial services, regulate private lending and support the
development of SMEs. Public expectations for the roll-out of financial
reforms, starting with Wenzhou, are high.
The government so far has acted quickly to tackle the immediate
problems, but the root of the malaise remains. While the Wenzhou
crisis seemed to strike without warning, it is the result of
long-standing contradictions in the Chinese economy, such as a decline
in the real economy, high market barriers for privately owned business
and long-term curbs on private financing.
In short, the Wenzhou crisis is a warning to China of a wider and more
severe economic problem. Measures made to tackle this particular storm
should apply to the whole country. We badly need a basket of reforms
to fundamentally solve the problem; putting out bushfires is no
long-term solution.
The significance of Wenzhou's economic model is one reason for the
considerable focus now on its problems.
Since the reform and opening up of China began, two major models of
economic development outside the route of state-owned enterprises have
made a name for themselves: the Jiangsu model and the Wenzhou model.
The former blurs the lines of party, government and business to spur
growth. Given access to abundant government credit, village and
township enterprises using this model boomed for a time. But as the
market economy developed, its many shortcomings became evident.
The Wenzhou model is purely privately driven. Entrepreneurs took the
route of family industries and professional markets, focusing on
consumer products, mostly daily necessities, to build a model of
"small products for large markets". The free flow of its capital,
labour and technology made it a far superior model to Jiangsu's. This
is why people have long held Wenzhou's example in high esteem.
But the recent spate of business collapses has exposed the Achilles
heel of the Wenzhou model. The storm began when new nationwide banking
policies aimed at cooling the property market created a sudden dearth
of credit. Wenzhou's private-sector economy, which has long lacked the
support of state-owned financial institutions, had to resort to
private financing, which itself was struggling to survive official
curbs. The results were extremely high financing costs and risk. The
shortage of capital and invisible market entry barriers, among other
factors, prevented manufacturers from upgrading. Wenzhou's
predominantly low-tech manufacturing sector, with its focus on
imitation rather than innovation, became uncompetitive.
The city's entrepreneurs have long been conscious of these problems,
but with little access to reliable capital they could find no way out.
Since the outbreak of the global financial crisis, prospects have been
grim for such mainland exporters. This in turn only encouraged
entrepreneurs to turn to high-yield but risky speculation. But as the
housing market regulations took hold on lending, Wenzhou was the first
to fall, and spectacularly so.
Obviously, such systemic problems are not restricted to Wenzhou, and
pose a challenge to China's programme of reforms. Overcoming barriers
to monopolised domestic markets was reportedly the most vocal demand
of Wenzhou's entrepreneurs at the recent forum convened by the
premier. Notwithstanding State Council directives to develop private
enterprise and investment, implementing these changes has been slow
and generally ineffective. Efforts to advance and regulate
private-sector funding have met a similar fate.
In recent years, demographic changes, rising labour costs and greater
industrial transformation have eroded manufacturers' returns. Business
confidence has plunged. If this continues, China's industrial
production will suffer, and its attempt to transform its economic
model from the world's factory to a world market will fail. Wenzhou's
crisis is a consequence of delayed economic liberalisation. While
state enterprises falter, so the private sector flounders as well.
The direction of reform is quite clear: the private-sector economy
should be given fair treatment and private financing services the
legal status to protect private assets. Only the political will of
leaders will determine if reforms succeed.
Given the huge private pool of capital in Wenzhou and the efforts of
different levels of government, Wenzhou's crisis is not likely to
become national. At the end of May, the national balance of private
company finance was 3.38 trillion yuan (HK$4.1trillion), just 10.2 per
cent of the total balance of private-sector renminbi business loans by
private institutions.
The entrepreneurial spirit of Wenzhou will survive, but it must change
with the times. This requires a sound institutional environment.
Wenzhou should be given full support in its search for a solution.
This article is provided by Caixin Media, and the Chinese version of
it was first published in Century Weekly magazine. www.caing.com
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