Informal loan habit stirs new trouble

According to recent Chinese press coverage, another wave of indebted entrepreneurs is fleeing Wenzhou, much to the chagrin of the city's informal lenders.

Wenzhou's business community saw a similar exodus back in 2011, when a downturn in the local manufacturing sector compelled a sizable contingent factory bosses to skip town on their creditors, many of whom were operating illegally.

But this time, things are different. Many who are fleeing now had investments in the city's property market or related industries. Local authorities should take note of this fact and prepare for even worse times than those which came three years ago.

Wenzhou was among the first major Chinese cities affected by the deepening real estate malaise. With the capital chain now effectively broken, banks should brace for defaults and an increase in credit risk.

The problems plaguing Wenzhou are serious and should come as warnings to officials and investors across the country. For the sake of China's economic health, informal lending must be avoided.