Manufacturing center faces shutdowns as private moneylenders demand loans be repaid before Chinese New Year

Small businesses in China could be facing their bleakest Chinese New Year in more than 30 years - up to 20,000 businesses in the city of Wenzhou, one of the country's main entrepreneurial centers on the east coast, could suspend operations or close down altogether over the next month, according to a leading local business organization.

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The small business sector in China, which makes many products which find their way to Europe and the United States, has had to rely on private moneylenders, some charging exorbitant interest rates, for a number of months.

Now many of the moneylenders - often consortia of other small businesses - want their money back.

It is traditional in China to settle all debts before the beginning of the Chinese New Year, which falls on Jan 23 this year.

Zhou Dewen, head of the Wenzhou Small and Medium-sized Business Development and Promotion Association, believes one in 20 of Wenzhou's small businesses could face closure.

"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.

Wenzhou, which is in the prosperous Zhejiang province, and the plight of its small businesses has been in the international media spotlight for many months.

The city, which has a population of 9.1 million and is famous for producing spectacles, cigarette lighters and shoe wear among dozens of other such products, is seen as a bellwether of the Chinese economy as a whole.

Many businesses have been hit hard by the economic crisis which has affected exports and up to 100 business owners are believed to have fled the country as a result of not being able to repay loans to moneylenders.

One of the most high profile of these was Hu Fulin, president of Center Group, one of China's largest spectacle makers, who absconded to the US in September. There have also been a number of suicides.

Until recently Wenzhou, a former treaty port and a city largely unknown outside of China, basked in its reputation of having more millionaires per capita than any other Chinese city and some of the country's most expensive real estate.

It was one of the first cities to develop a private economy in the wake of reform and opening-up led by Deng Xiaoping in 1978.

Despite designer stores like Gucci and Bentley car showrooms, there is now more of a chill in the city, which is some 600 km south of Shanghai, despite its mild winter climate.

Hu Xucang, the 36-year-old president and CEO of Aroundasia, a Wenzhou private equity company, says many of the city's small business owners feel trapped by their circumstances.

"They feel they have no choice but to borrow from underground lenders. If they don't, they will die today. By borrowing money, they just have a chance of not dying tomorrow," he says.

Hu, who has a suite of modern offices in the Financial Center Building in Chezan Avenue, is himself a successful entrepreneur.

Hu, who set up a plastic pipes business in his early 20s, which now employs 800, and his private equity fund has 5 billion yuan to invest, says there is now a big mismatch between the funding available and the needs of businesses.