Zhu Lefang waves a piece of paper listing companies of interest to his small investment firm in Wenzhou, a city of 9m in eastern China.

“The harder it is for companies to get loans, the more business there is for us,” he says. “And the last six months have been very, very busy.”

As China seeks to rein in stubbornly high inflation, measures to tighten borrowing have prompted fears that the country’s small and medium-sized enterprises (SMEs) will be hit hard, as credit is channelled instead to large state-backed companies.

But the real picture is more complex. Rather than facing a widespread credit squeeze, the SME sector is undergoing a painful process of restructuring. Capital is being funnelled towards high-tech and green energy-related companies at the expense of traditional low-end manufacturers.

In Wenzhou, China’s SME heartland, many of the shoe and clothing factories are indeed struggling.

“During the financial crisis, there were no orders. Now, there are orders but no one dares to fulfil them because it is impossible to get credit from banks,” says Zhou Dewen, who is a director of several SME associations and has emerged as the city’s leading business advocate.

Mr Zhou says at least 20 per cent of Wenzhou’s SMEs – there are 360,000 in the city – have already cut back operations or closed their doors this year. State media have carried reports of cash-strapped SMEs borrowing from underground lenders at annualised rates of 60 per cent.

But for all the alarmist talk, Wenzhou is hardly about to run out of cash. This is a wealthy city, with the fourth highest per capita income in China. Far from money being too tight, the opposite is true in many parts of the local economy.

Instead, interviews with local factory managers, investors and bankers reveal a city in the midst of fundamental change in what it produces, with the government prodding companies to make more sophisticated products as rising wages undermine the low-cost model of manufacturing. A lack of financing, they say, is a symptom and not a cause of the troubles facing traditional industries.

“The government is trying to bring about change and is supporting high-tech sectors. We are no longer the kind of company it wants,” says a manager at a factory owned by Yibaini Shoes, a small maker of cheap women’s shoes, where workers’ salaries have tripled in the past five years.

Pan Shifei, head of retail lending at the Bank of Wenzhou, says he is focused on extending credit to smaller, local companies – but only to those that make the grade.

“We are very clear. There are some SMEs that have bad management or no real prospects,” he says.

People from Wenzhou are renowned across China for their investment acumen and are often said to be behind speculative bubbles, from soaring property prices to a garlic mania two years ago.

Mr Zhu’s investment firm plans to buy into the high-tech and clean-energy companies that the government has identified as development priorities.

And as for getting the finance to back his investments, there is no problem: he has homes in Shanghai, Wenzhou and Hong Kong and has put them up as collateral for bank loans.

“If I just relied on the money in my hands, it wouldn’t be enough. The key is to know how use your assets,” he says.

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