1 in 20 wenzhou SMES may suspend operations, close in next few weeks

Zhou Dewen is a man in the eye of a storm. His mobile phone rings virtually every 30 seconds with him having to answer yet another about the Wenzhou funding crisis.

The 50-year-old, head of the Wenzhou Small and Medium-sized Business Development and Promotion Association, has difficulty sitting still in his office on Jinxiu Road, jumping out of his seat at regular intervals.

"We have been the center of attention since the beginning of the year (2011) with many SMEs facing a survival challenge because of cash flow problems," he says.

Zhou, small and wiry and huddled in an overcoat, has given interviews over the previous few weeks to major media organizations, including the BBC, the Wall Street Journal and the Financial Times.

He has also had the chance to put forward his views to Chinese Premier Wen Jiabao on his visit to Wenzhou in October.

He estimates that about one in 20 or about 20,000 of Wenzhou's small- and medium-sized businesses may suspend their operations or close altogether over the next month.

"I believe it will be the worst Spring Festival since reform and opening-up more than 30 years ago because small business entrepreneurs are facing greater pressure than ever to pay back their loans and the profits from the manufacturing industry have been much reduced," he says.

He says the forthcoming holiday period will be a particularly acute time because private money lenders - who often charge sky-high interest rates - traditionally ask for their money back before the end of the year in the Chinese calendar.

"The private lenders will ask for their money back any time they want but it is a tradition at Spring Festival-time to have debts settled and this puts extra risk and pressure on private companies," he says.

"The problem is not with the mainstream banks which will not ask for their money back before the expiration of the term," he says.

Although all the focus has been on Wenzhou, Zhou does not think the current problems are restricted to the manufacturing city in Zhejiang province.

"There are similar problems in other parts of China which haven't received the same degree of attention. At the beginning of the year, I visited Ordos (the Inner Mongolia autonomous region), Dongguan (Guangdong province) and Xiamen (Fujian province) and they also had the same kind of issues," he says.

"Wenzhou gets all the attention because it pioneered the development of small businesses and is seen as some sort of bellwether of the private economy."

Zhou had just returned from lunching on duck tongues and other local culinary favorites with a group of well-heeled business associates at the nearby Tian Yi Jiao restaurant.

He returned in a cortege of black limousines, including a Mercedes and a BMW, suggesting some of his business associates are not feeling the extent of the icy winds of the funding crisis as some of his 2,000 members.

Zhou says he feels sorry for those hardest hit and he knows of at least six who attempted suicide.

"When some people are caught in difficulties, it is very easy for them to get depressed and get into a blue mood. I feel very sorry for these cases. It is not they who want to commit suicide. It is the situation they find themselves in which pushes them into this desperate situation," he says.

Zhou, who is a native of Wenzhou, spent his early career in academia. He taught corporate management at Wenzhou University for 10 years before going into business himself.

He went on to help found the small businesses association, which he claims was the first of its type in China.

"I thought SMEs were a disadvantaged group and needed help so that is why I set up the organization," he says.

"It was the first association to promote small and medium-sized business development nationwide."

Since Premier Wen's visit in the autumn, the State Council has announced a number of measures to alleviate the funding problem for small businesses. These include increasing the turnover threshold above which businesses pay value-added and other business taxes, reducing the reserve requirement ratio for small banks so as to allow them to lend more and also freeing small businesses to issue more bills and bonds.

But Zhou believes that these will only be effective in the short term and that a more long-term solution needs to be found.

"The policies and measures introduced so far are to eradicate the crisis. What we need are more long-term reforms in terms of the structure of finance, taxation, investment, the availability of funding and a better administrative environment for small businesses," he says.

Some of the mainstream banks in Wenzhou insist the problem is not down to them. Wenzhou Bank, one of the largest local banks, says its lending to small business was 15.6 billion yuan ($2.47 billion, 1.91 billion euros) in the first 11 months of 2011, 17.5 percent higher than the 13.27 billion yuan for the whole of 2010.

Zhou insists it is far from the full picture and ignores that many small businesses do not have access to mainstream banks.

"Almost 70 to 80 percent of SMEs don't have any access to the banks. For some of the banks there is also no third party verification to say whether the data is accurate or not," he says.

"Maybe because the government asks businesses to increase the amount of loans they give, they give this good data to meet the government's requirements."

He insists some of the banks have altered their definition of small businesses and have included larger businesses in the category.

"Whether it is difficult for SMEs to get finance is for the SMEs themselves to judge, not the banks," he says.

The focus in Wenzhou has been on private money lending, which Zhou estimates to be about 120 billion yuan in Wenzhou and 1.5 trillion yuan across Zhejiang province.

He insists the government should bring in far greater regulation of this sector.

"The government should take every effort to regulate private lending and to avoid the high interest rate loans and some of the extreme cases we have seen," he says.

Meanwhile he believes for many small business owners it will be a matter of just trying to get through the next few weeks.

"The Spring Festival is the most critical and acute period. It should be a very prosperous period because firms step up their production but they need to be able to borrow money to be able to do this and at the moment many of them can't."