Wenzhou business owners struggle in credit crisis

Wenzhou business owners in Zhejiang Province used to rely on a collective loan guarantee method to help each other procure capital from banks. But now many of them have stopped provide and accept such guarantee and they are facing shortage of fund in their business. CRI's Laiming has more:

Private enterprises in Wenzhou are experiencing a credit crunch. Many have gone bankrupt, while those that survive have yet to feel the impact.

Liu Shunfeng, chairman of Zhongguang Technology Corporation, evaluates his loss.

"We made a loan guarantee for another company for 58 million yuan. When the company got into trouble, the bank took money from our account. The immediate damage to our business was 500 million yuan."

Loan guarantees were popular among Wenzhou private enterprises, who were accustomed to helping each other obtain bank loans. Even the banks preferred this arrangement because it reduces risks.

The method worked well while the market was booming, but it is taking its toll during the economic slowdown, observes the president of the Wenzhou Lighter Association Huang Fajing.

"Many business owners were imprudent when giving loan guarantees and weren't quite aware of the responsibility. They may give a guarantee to save a friend's face, but when their friends get into trouble, they have to assume the responsibility."

The problem is aggravated by mishandling the loan. Many business owners make long-term or speculative investments, which can result in a shortage of capital or even bankruptcy.

Many business owners have decided to give up loan guarantees for good, but that means they'll have to fight a capital shortage all on their own.

Many have lost the battle already. Among the nearly 4,000 sizeable companies in Wenzhou, 140 had stop production in June, and another 57 percent have reduced their capacity. The negative impact has extended to the city's general economic outlook. As of August, the Wenzhou GDP has dropped behind the top three cities in Zhejiang Province, with the lowest growth rate among 11 municipalities in the province.

Against the backdrop, Zhou Dewen has called for a re-evaluation of the method. He is chairman of Wenzhou Small and Medium Enterprise Development Association.

"We can't just give up on loan guarantees just because we run into problems. We must realize that it is a useful method that helps small and medium business owners to procure necessary capital for their development."