100 Corporate Leaders Flee in Connection with Wenzhou’s Civil Debt Crisis

• Author: Zhou Zhenghua

Forty eight year-old board chairman, Hu Fulin, of the private company Zhejiang Xintai Group, Ltd. decided to flee to the United States in September of this year once it became clear that his company had no way of repaying its 10 million RMB loan, which was due at the end of September this year. He returned to the country only after receiving assurances from the government that it would “not press for repayment” of the loan. Since April this year, no fewer than one hundred corporate leaders in circumstances similar to Hu have fled Wenzhou, a figure which accounts for .02 percent of all Wenzhou-based companies and a sum of over 10 billion RMB of outstanding debt. According to reports, the majority of the outstanding loans owed by these companies are due for repayment at the end of this year, and so it is expected that there will be many more cases of CEOs fleeing the country as that deadline approaches.

In Wenzhou, mid-sized companies with annual output figures of around 30 million RMB are normally able to obtain bank loans without any difficulty in any normal year without sudden economic policy adjustments. Owners of smaller companies typically rely on friends and family for loans, or otherwise obtain the necessary funding from financing guarantee institutions. In May of 2008, the People’s Bank of China et., issued its “Guiding Opinions on the Pilot Operation of Small-Sum Loan Companies,” which provides that loan applicants may be natural persons, business enterprises that are legal persons, or public organizations, and which further stipulate that private enterprises seeking micro-loans should have registered capital of no less than 5 million RMB. However, Zhejiang provincial authorities raised the threshold for qualification as a “small-sum loan company,” requiring companies to have registered capital of at least 50 million RMB. In the end, only Zhejiang’s largest-scale enterprises were therefore able to receive micro-loans.

Surveys indicate that roughly 89% of individuals and households and close to 60% of enterprises in Zhejiang engage in or participate in private lending. This accounts for a total sum of roughly 110 billion RMB in loans, of which roughly 35% goes to funding industrial enterprises, while the rest goes into investment and short-term loans. Because the annual interest rate of the...