Lending Crisis Stokes Fears of ‘China Economic Model’ Collapse

October 24, 2011 Updated: October 1, 2015

A distorted economy has given rise to a private lending crisis in several cities in China. Chinese blackmarket moneychangers trade foreign currency for renminbi (yuan) with two customers (R) outside a branch of the Bank of China in Shanghai, Feb. 7, 2007. (AFP/Getty Images)
A distorted economy has given rise to a private lending crisis in several cities in China. Chinese blackmarket moneychangers trade foreign currency for renminbi (yuan) with two customers (R) outside a branch of the Bank of China in Shanghai, Feb. 7, 2007. (AFP/Getty Images)
China’s distorted economic model is to blame for the lending crisis faced by privately owned businesses, that has hit several Chinese cities, including the wealthy city of Ordos, and Wenzhou, the eastern entrepreneurial hub, according to leading Chinese economists.

Dubbed as Dubai of China, Ordos, in Inner Mongolia, is one of the wealthiest cities in all of China, where private business has flourished. Over 7,000 residents own assets worth more than 100 million yuan (US$15.67 million), according to a report by the Ministry of Housing and Urban-Rural Development. More than 80 percent of property development in Ordos has been financed by private lending, according to the report.

However, since July at least one business owner in Ordos has committed suicide and several have fled after failing to resolve their debts owed to private loan sharks.

Mr. Wang, a local businessman, told The Epoch Times that the area’s rich natural resources have created many nouveau riche who wanted to make money with money, which led to the booming usury business there.

Many people were engaged in speculative real estate investments a few years ago, according to Ms. Song, an Ordos resident. But recently almost half of Ordos’ real estate businesses have closed or are facing closure, a real estate agent told The Epoch Times.

“Many real estate companies in Ordos have been facing disruption of their capital chain, which will get worst by the end of the year,” financial analyst Li Huizhong, who investigated private capital in Ordos, told China’s National Business Daily.


Wenzhou Business Shut-Downs

In China’s eastern entrepreneurial hub of Wenzhou, Zhejiang Province, a thriving underground lending market has helped keep small and medium-sized enterprises (SMEs) going for years.

But with the economy slowing down in recent months, at least 90 business owners have disappeared, leaving behind mounting debts and their companies completely or partially shut down. Three business owners were reported to have attempted suicide.

A lot of money from private lenders has also gone into the real estate market, Zhou Dewen, chairman of Wenzhou’s Small and Medium Enterprise Development and Promotion (SMEDP) told Zheshang Magazine. Only 35 percent was invested in businesses, according to a report by the Central Bank’s branch in Wenzhou.

Characterized by low cost and low profit margins, the Wenzhou model has been challenged by increased cost of production, labor, and land. Consequently, the average profit margin for Wenzhou’s SMEs has dropped to between three and five percent, Zhou told the Guangzhou Daily.

Unfair Economic Environment

Bank loans are hard to come by. Nearly 90 percent of SMEs in Wenzhou could not obtain loans from banks, according to a recent report by Wenzhou’s SMEDP. Private businesses that do get a bank loan have to pay higher interest rates and higher loan processing fees than state-owned enterprises (SOEs).

Private businesses are also deprived the right to enter high-profit sectors monopolized by SOEs. Real estate is one of the few high-profit sectors open to private businesses, and that’s why so much hot money in Wenzhou and Ordos has gone into the real estate market.

The increased money tightening, and a series of measures to curb the real estate market since early 2011, eventually led to a private lending crisis.

After visiting Wenzhou on Oct. 5, Premier Wen Jiabao urged financial support for SMEs and recommended a crackdown on the private high-interest lending market. But private lending has helped many private businesses stay in business, and a crackdown will only aggravate the problem, according to Zhou Bin, chief economic editor of the 21st Century Business Herald.

China has more than 10 million privately owned SMEs, accounting for 99 percent of enterprises, generating 60 percent of GDP, 50 percent of tax revenues, and 80 percent of job opportunities, according to data released by the Department of Medium & Small Enterprises at the Ministry of Industry and Information Technology.

Hu Xindou, an economics professor at the Beijing Institute of Technology says the Chinese regime’s monopolistic system has distorted the economy by establishing a discriminative and unfair economic environment that is dominated by bureaucracy and power.

“China’s distorted economy is responsible for creating the current financial crisis in Wenzhou, Ordos, and other areas of China,” Hu told Private and Entrepreneur Magazine.

According to Hu and several other analysts, the Chinese regime needs to be serious about building an open economy that gives equal access and opportunities to all businesses, including SMEs and SOEs, that allows private banks to operate, and that implements market-based interest rates instead of the rigid state-controlled interest rates.

Liu Zhendong, chief journalist of Economic Information, warned that the lending crisis in Wenzhou and Ordos is a sign that the real estate bubble is about to burst.

According to the Business Herald’s Zhou Bin, the Wenzhou model is the epitome of the China economic model. Many people are worried that the collapse of the Wenzhou model may lead to the collapse of the China economic model.