China’s papers are calling it their “own subprime crises.”According to Shanghai Daily, 7 large business owners, mostly manufacturers, fled the city of Wenzhou on September 12th. They left thousands of employees jobless and hundreds of millions in unpaid debt.
This is one of the consequences of China’s “black bank,” the massive undergound banking system that has been growing at a dizzying pace since the government started tightening credit to curb inflation. Banks favour state-owned businesses when it comes to lending, so when private business owners need to take out a loan, they turn to the alternative, to the underground.
Going to the undergound has two consequences: For those who take out loans, it means having to pay much higher interest rates than they would if they borrowed legitimately. For the lender, it means that if a loan goes unpaid, there isn’t much that can be done about it.
In other words, if business is bad for a business owner with an underground loan, they can just walk away. So they do.
One of the runaway employers is Hu Fulin, the owner of Zhejiang centre Group (ZCG). ZCG owns the most popular sun-glass company in China (they make 20 million pairs a year) and employed 3,000 people. He also invested in real estate and the renewable energy industry.
Hu is penniless now, but he owes his employees their August and September salaries (about $1.5 million), and he hasn’t paid his suppliers either. The city government has set up a task force to figure out how to track all of Hu’s loans and repay his debts.
It’s rare that the authorities are able to catch bankrupt business owners before they leave town, but sometimes it happens. Zheng Zhuju, the 49 year old owner of a home appliance store, tried to skip Wenzhou leaving $43.8 million in unpaid, underground debt. She was arrested beforehand, though, and has been incarcerated since September 13th.
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