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China’s City of Entrepreneurs Waits for Deeper Reforms

The Chinese entrepreneurial capital of Wenzhou is one of a few places in China where the country’s leaders are already experimenting with financial reforms.

For more than a year, the government has paved the way for the opening of private banks and lending centers, but the reforms have so far seen only mixed results.

Wenzhou China

Wenzhou China

Economists and entrepreneurs say that for change to really take hold, deeper reforms are needed.

Businessmen and women in Wenzhou have long had a reputation of being risk-takers, individuals constantly in search of the next big business opportunity, be it domestic or international.

Be your own boss

Entrepreneurs from the city have investments in countries around the world and across China. In this coastal port, known for its temperate climate, everyone wants to be his or her own boss.

Wu Zhengzhou is opening a Chinese restaurant chain in the city and hopes it will take off here, just as it has in his hometown of Nanjing.

“We chose Wenzhou because it is a wealthy city and there are lots and lots of people here,” Wu said. “The opportunities for business are big.”

Wang Meifeng, a community party leader, has tapped into Wenzhou's shoe industry and sells boots online. She says that while some are satisfied with work that allows them to just have enough money to pay their basic expenses, people in Wenzhou are different.

“We want to earn a lot of money and to do that we are willing to work a lot,” said Wang. “Wenzhou has lots of salespeople all around China who follow the demand for everyday products.”

Credit crunch

Wenzhou’s small and medium sized businesses have long thrived with the support of informal lending networks from families and friends. Residents are known for their keen sense of business opportunities, but that has also come with a reputation for grey-market lending.

When credit began tightening up two years ago in the wake of the global financial crisis, the city’s entrepreneurial spirit was hit with a major blow. Some business leaders fled. Others leaped from high-rises in the city to their deaths.

The real estate market started to tank and the cost of some properties along the Oujiang River dropped by as much as 40 percent at their lowest point, but now the building boom appears to be back.

While entrepreneurs are still struggling under the weight of heavy debt, the city’s mayor says Wenzhou has about $100 billion available for investments.

In many ways, Wenzhou is like a smaller version of China, says economist Hu Xingdou.

"Wenzhou's development of a market economy came much earlier than in the rest of China, and because of that it also faced an early economic crisis,” Hu said.

Shadow lending out of the shadows

The government’s solution to Wenzhou’s problems was to allow for the establishment of private banks and smaller lending centers. The hope was that by loosening restrictions in a country where state banks dominate and limit small and medium size enterprises access to credit, it would bring shadow lending out of the shadows.

A year into the reforms, the number of small loan companies has grown to about 40, but only several private banks have been established.

“You can encourage private enterprises to set up banks but if the big stakeholders are still state-owned banks then people are not going to be that keen in setting up private banks,” said local entrepreneur and financial adviser Chen Shu.

Local economist Ma Jinlong said the reason why there has been no breakthrough in enticing more private banks is because of the continuing dominance of state-backed enterprises.

“In Wenzhou, the contradiction between state-run companies’ monopolistic status and the growth of private enterprises is even more severe than in other parts of the country,” said Ma. “So if we do not make a breakthrough in reforms what has happened in Wenzhou could happen in other places in China.”

Risks and opportunities

Currently, the majority of lending in China is done by big state-owned enterprises. Those funds typically go to large state-owned companies. China knows that it needs to reform this system.

At a major meeting last month, the third plenum of the Communist Party, China’s leaders agreed to let the market have more sway in the economy. Over the past year, they have allowed the loosening of interest rates at banks and called for allowing private capital in banks.

Even so, changing China’s long held practice of using loans from state owned banks to prop-up state firms and keep the economy going will not be easy.

Small and medium sized enterprises in Wenzhou have long survived because the city is located in a province that has been a national leader in private capital.

While it may be riskier to invest in small and medium sized enterprises there are opportunities there as well according to Eswar Prasad, an economist at Cornell University.

“If it's done so that the informal banking system, or even the smaller banks in Wenzhou, can actually start making better profits by selectively lending to the small and medium size lenders, that could create some pressure on the formal banking system to start thinking of lending not just to the state owned enterprises,” said Prasad.

Still, economists say that a major breakthrough is unlikely to come, even in business savvy Wenzhou, until the entire financial system changes and ends the dominance of state owned banks.