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When entrepreneurs in China seek financing for their projects they often turn to the informal credit market because the state-owned finance channels tend to prefer state-owned firms. Wenzhou is a manufacturing capital in China that produces everything from cigarette lighters to tennis shoes – its economy is both a shining example of how far China has come in so short a time and it is an example of development run amok. According to Time, Wenzhou’s entrepreneurs have been recently fleeing their creditors and committing suicide because of inability to repay loans. Time’s Austin Ramzi describes the relationship between China’s entrepreneurs and informal credit channels as a natural one but since the weakening of the international economic climate since 2008 the informal credit channels have come under increasing strain as entrepreneurs struggle to stay afloat. The People’s Bank of China’s efforts to curb inflation after their round of stimulus spending restricted formal credit channels and forced more market players into the informal market. The severity of the problem will become apparent before the Chinese New Year when most informal lenders call in their loans. If indebted people are unable to pay off their loans with revenues earned from their ventures, they could begin unloading property at a discount and implode the city’s real estate bubble which is very similar to the one occurring in the Inner Mongolian city of Ordos.

 

[TIME]

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