Wenzhou economy 'still healthy' despite recent debt problem

Measures taken to ensure private firms can obtain vital funding

WENZHOU / HANGZHOU - Debt-laden entrepreneurs who fled from Wenzhou, Zhejiang province, have only had a "limited impact" on the local banking system and the overall economic situation in the region remains healthy, banking executives and analysts said.

Most of the small companies in Wenzhou, a vibrant private-sector hub, rely on underground banking networks to raise cash amid credit tightening by banks. These networks charge interest rates as high as 90 percent.

A spate of debtors fleeing the city, after taking out loans at exorbitant rates, had caused alarm. More than 90 borrowers, unable or unwilling to repay their debts, have fled since April. There were fears that these debts, estimated to be about 20 billion yuan ($3.1 billion), endangered the banking system.

"The general economic situation in Wenzhou, and Zhejiang province as a whole, remains stable and healthy," a senior executive at the Zhejiang branch of the Bank of China, said.

The companies whose bosses had fled account for only a tiny fraction of some 500,000 enterprises in the city, he said.

About 90 percent of local households or individuals, and nearly 60 percent of enterprises, are involved in underground banking networks, according to data from the People Bank of China's Wenzhou branch.

For those banks that do lend to private firms, the scale was too small to cause big losses.

"Potential losses only account for less than 20 percent of the money we lent to the problematic enterprises, and the collateral for these loans can fully cover the risks," the bank executive said.

Chris Leung, senior economist of the Singapore-based DBS Bank Ltd, said that "mounting concern over China's underground banking system is a non-event" because it is likely to be very small relative to the State banking system.

Moreover, lending outside the official banking sector is likely to be geographically restricted to some cities rather than a national phenomenon, he said.

Underground banking provides loans of about 3 trillion yuan, compared with loans of 52.4 trillion yuan from State banks, according to figures from the China Banking Regulatory Commission, the industry watchdog.

The government has taken a slew of measures to tackle the credit crunch and the problems that it has caused in Wenzhou, including capping interest rates and ordering banks to expand lending to small companies.

The State Council on Wednesday unveiled a set of measures to ease a funding squeeze among small businesses.

The steps, including allowing small banks to continue to implement "relatively" lower reserve requirement ratios, the amount they have to set side, than big banks, were announced on the government's website (www.gov.cn) after a State Council meeting presided over by Premier Wen Jiabao.

Wen last week visited Wenzhou and urged stronger financial support for smaller businesses.

The reserve for big banks stands at 21.5 percent and 19.5 percent for smaller banks.

"Currently, some small- and micro-sized firms are facing operating difficulties, heavy tax burdens and are finding it hard to get finance, all of which we need to pay attention to," the Cabinet statement said.

The government will allow small firms to issue more bills and bonds and will raise the threshold for levying value-added and business taxes, it said.

Reuters contributed to this story.