Fear of domino effect
Wenzhou has about 360,000 SMEs and is home to some of China's biggest producers of shoes, clothing, cigarette lighters and leather goods, and is seen as a barometer of the health of the country's private enterprises.
According to Zhou Dewen, because of low profitability, many SMEs have become less passionate for the manufacturing sector and have gradually given up their principal businesses and money-making dreams in favor of riskier ventures.
For a long time, the Center Group had no problems in its operations. However, the profitability of Wenzhou's manufacturing industry is relatively low, so many enterprises tried to expand their businesses into household appliances and the real estate market, which promise greater profitability but require more money for investment. When the bosses obtained mortgages at high leverage points, they put previously healthy enterprises in jeopardy.
Some say that the collapse of the Zhejiang Center Group is only the beginning, as many Wenzhou enterprises are trying to achieve a successful transformation of their businesses. In fact, the same problem has already expanded to other places. If the wave of SME collapses continues to grow, it may bring calamity to the economy of the whole nation.
Financial reform urgently needed
Private lending has now become a common practice for residents in Wenzhou. It was reported that about 89 percent of Wenzhou's residents have engaged in the private lending business, and the country's informal lending market has expanded to almost 4 trillion yuan ($618.4 billion).
However, since the market is not under strict regulation, it may affect the capital chain and the operation of enterprises across the nation, and any macro policy is likely to cause unexpected impact to social stability.
Some scholars point out that prevention is not the right solution. Instead, it would be wiser to make room for private capital and guide it into use systematically. When non-governmental lending becomes legal, it may break the monopoly of the current banking sector and create a healthier lending market.
