personal note: I decided to share my book with friends and students in mainland China because it is expensive to order one from USA. Enjoy it and share it with people you care and love. Peace, steve, usa, July 7, 2019 firstname.lastname@example.org blog – https://getting2knowyou-china.com
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Imagine Bob driving me through the city of Wenzhou, a city created by Guo Po, the founder of Feng Shui, and not be enamored with Wenzhou’s many successes and accomplishments.
Maybe thanks to its good Feng Shui ambiance, Wenzhou was the first city in China to set up individual and private enterprises and shareholder cooperatives under reformer Deng Xiaopeng, when China began its economic reforms in 1978 after the death of Chairman Mao. It is reported the per capita disposable income for urban dwellers rose from 422.6 yuan in 1981 to 28,021 yuan in 2009 for a third-tier city. The GDP of Wenzhou itself rose from 1.32 billion yuan in 1978 to 252.8 billion yuan in 2009.
Maybe thanks to its good Feng Shui development, Wenzhounese took the lead in China in developing a commodity economy, household industries and specialized markets when China switched from its planned economy to the so-called market or capitalist economy with Chinese-socialist characteristics in the late 1980s. These private economic developments created the “Wenzhou Economic Model” which is credited with the modernization drive in China. No small surprise that Wenzhounese are labeled the “Jews of the Orient”.
Maybe thanks to the good Feng Shui milieu, many Wenzhounese, equipped with business sense in a dominantly commercial culture, are being stereotyped as real estate speculators, leading China Daily to think their buying investments “play a disproportionately large role in the increase of property prices all over China.”
Maybe thanks to the good Feng Shui environment, Wenzhou is also famous as the cradle of mathematicians in China and the world. The city has given births to over 200 mathematicians—more than any other city in the world—known both domestically and internationally in the past 100 years.
Maybe thanks to the good Feng Shui location, Wenzhou has been for centuries a hub of Christian missionary activity and because of its large concentration of Christians, it has been dubbed the “Jerusalem of the East”.
Now I am here visiting Bob in Wenzhou.
“Where were you in 2011?” I asked Bob my first night in Wenzhou. I had to stay in a hotel because there was no heater in his house. This was supposed to be the coldest
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winter in the city. I had no choice but to stay in a hotel downtown.
“2011? Why? That was my final year in high school and I was busy studying for the Gaokao. And after that I was busy preparing to leave home to study in a college in Xiamen,” Bob said.
I was a visiting professor at the same campus. “I heard and read terrible stories about some businesses in your city. That many businessmen disappeared and a few killed themselves. Were you aware of this happening in your city some time in 2011?” I said.
“Not really. I just told you I was busy studying. I was too young to understand anything. My parents were working in another city and so they did not say anything to me,” he replied.
It seemed everything I would attempt to tell him or share with him about Wenzhou would be prefaced with do you remember? Or do you know?
It took an outsider like me to tell an insider like Bob of the events that could have destroyed the whole city of Wenzhou economically because of its complicated and intricate networks of business enterprises, owners, investors, lenders and borrowers in massive underground illegal operations, which threatened to destroy the lives of many people in Wenzhou.
You know Bob, Wenzhou is geographically isolated from the rest of China and because of its small arable land the city has focused on trade for centuries. It is said that even during the time of Chairman Mao, private enterprises, though suppressed throughout China, were not completely eliminated in your city, and so when China started the market reforms under the paramount leader Deng Xiaopeng, Wenzhou exploited it and flourished. And thousands of small, low-cost manufacturing operations started involving thousands of families—producing anything and everything sold all over the world—and this so-called “Wenzhou Model” of private entrepreneurship was copied everywhere in China, and inspired the modernization drive.
You know Bob, that in 2008 when the global financial crisis hit, many governments tried to initiate economic-stimulus package to keep the domestic economy going. The Chinese government did the same thing with a huge economic-stimulus package and ordered all its banks to flood the market with credit. Why? To keep the domestic economy running. But in Wenzhou, the SMEs (Small and Medium Enterprises) had difficulty getting any help from the official banks because SOEs (State-owned
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Enterprises) were using up most of the money available.
You know Bob, that in early 2011, the government estimated 60% of Wenzhou businesses and 90% of households were involved in some form of private lending.
You know Bob, in early October, 2011, Chinese Premier Wen Jiabao visited Wenzhou and he ordered local banks to lend more and promised a crackdown on abusive underground lending.
You know Bob, it is no secret local businesses from the start turned to one another for financing. It is said almost everyone in Wenzhou has lent or borrowed through the informal borrowing and lending networks and this nonbank credit may have been one of the sources of Wenzhou’s success but now threatened to bring the local economy down. Wenzhou, the locus and symbol of private enterprise, has over 140,000 companies and many of its businessmen have also invested heavily in many other ventures across mainland China. What happened, therefore, in Wenzhou could have dire consequences for the rest of China.
You know Bob, that something terrible took place in the final quarter of 2011; it seemed Wenzhou was going through a financial crisis, according to local media reports. Some factory bosses had disappeared because of bad debts and a few had committed suicide after they were unable to repay high interest private loans. Some large borrowers just stopped repaying. According to local media reports, it was estimated underground lending in Wenzhou at 110 billion yuan, a third used for economic purposes, the rest going to speculative investments all over China.
You know Bob, while you were a freshman on the campus, I was teaching there and I began to hear rumors about the crisis in your hometown. Then I read international reports of the financial troubles brewing in Wenzhou, threatening the rest of China. And of course everyone wanted to know why. Why Wenzhou? It wasn’t difficult to find the chief culprits for the sudden economic downturn.
You know Bob, not just Wenzhou, the whole of China was experiencing weak demand from import countries like America and Europe for Chinese products. Wages and costs of materials were going up. A few factories outside Wenzhou were on the brink of shutting down. The Chinese currency was steadily appreciating, making it more difficult and expensive to sell Chinese products overseas.
You know Bob, it is no hidden secret that the main cause of the Wenzhou economic crisis can be traced to the local tradition of private lending. Your city has been a
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Mecca for private entrepreneurship and grey-market lending. Blame that on the Chinese banks which prefer to lend to government-backed large state-owned enterprises. The government efforts over the previous year to control inflation led to restricted bank credit. These events drove many SMEs to seek for more underground loans even more with interest rates as high as 60 percent. Any sane businessman could tell you such levels of returns are untenable. The credit market was slowly collapsing.
You know Bob, anxiety about Wenzhou economy was building up because of the coming Chinese New Year some time in January 2012 when private lenders traditionally would call in their outstanding loans. Heavily indebted Wenzhou businessmen might unload their real estate at discounted rates which could burst the property bubble, not just in Wenzhou but also in Beijing, Shanghai and other cities where many of them have invested. A massive sell-off in the property market or cutoff of liquidity for manufacturing in Wenzhou could evolve into or result in a national crisis.
You know Bob, in early March, 2012, Chinese Premier Wen Jiabao told reporters: “The problem now is on the one hand, many small and tiny businesses are in bad need of money, but on the other hand, banks can’t satisfy their demands.” By late March, China’s State Council (the highest executive organ of State power as well as the highest organ of State administration, namely the Central People’s Government) announced that Wenzhou would be the site of a pilot project for the reform of private investment rules. Premier Wen Jiabao was the head of the State Council. As Wenzhou continued to struggle with the illegal loans, Beijing wanted to legalize and provide a regulatory framework for such activities. Many in China saw this not only as an attempt to legitimize Wenzhou’s private finance market, but as a model and project to clean up all underground lending in China as a whole.
You know Bob, it is a common practice for the central government in Beijing to try new reforms or pilot projects in certain designated areas—like the one now in your city—before rolling them out nationwide. Paramount leader Deng Xiaoping, for example, did that with Shenzhen as the country’s first “special economic zone”, open to foreign investments in the late 1970s when Shenzhen was an unheard of small village with rice fields next to Hong Kong.
You know Bob, a very important event was taking place in China around the time of the Wenzhou financial crisis. Reporters had asked Chinese Premier Wen Jiabao about Wu Ying, a female entrepreneur from Wenzhou, at the time on death row. She was sentenced to death by a local court for illegally raising 770 million yuan in funds for her business. She became a “cause celebre” as many people in China supported what
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she did, that her private lending and borrowing activities should be protected and not punished by the Chinese government.
You know Bob, her rags-to-riches story is about a female who dropped out of school as a teenager and began her business empire with a hair salon. State media praised her as an example to Chinese female entrepreneurs. And like many other entrepreneurs, she was able to raise money from private lenders but was convicted of illegally raising 770 million yuan from investors in 2005-2007. The original death sentence by a lower court prompted an outcry on internet forums by many supporters who said “it was too severe given that corrupt Communist Party officials often escape punishment.” Amid an outcry of the severity of her punishment, China’s Supreme Court rejected the death sentence. The case had prompted debate over the difficulties most small and medium businesses in China face where state-owned banking systems tends to favor state owned companies. For years Beijing has tolerated underground lending as a way to support businessmen who create jobs and tax revenue. But fear of large scale lending and borrowing and possible involvement of state banks and companies led Beijing to crack down in recent years.
Would the Chinese people support Wu Ying and her illegal borrowing and lending practices if she had come from a wealthy family in China? I have my doubts. But they did support the humble Wu Ying, a poor girl who never had a chance to finish her high school education but built an empire from the bottom up. I did not see, read or hear anything to suggest the same genuine supporters of Wu Ying would condone the massive underground lending and borrowing practices in Wenzhou.
The real question facing the central government: did the new pilot project in Wu’s home city of Wenzhou introduced in March 2012 make it easier for all entrepreneurs to get bank loans? Did it radically eliminate the gray lending practices that once contributed to the flourishing economic activities and successes in the city? Only the Wenzhounese people would know the truth! It seems obvious to me that Bob’s parents were busy working in another city in another province, untarnished by the tragic events and financial scandal in Wenzhou. It seems to me Bob had slept through it all.
This is China.
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