Wenzhou Economic Collapse a Warning For China

Wenzhou businessmen have been going bankrupt, on the lam, or jumping off of buildings since 2011. One major reason, perhaps the reason, is the decline in real estate prices. Wenzhou's prices have fallen for more than 30 straight months and prices are down 20% city-wide, leaving plenty of room for much deeper declines in many areas. Prices for commercially built new homes peaked at ￥33289 per sqm in 2011; in January 2014, there were at ￥19374 per sqm, a drop of more than 40% and prices have fallen further in 2014.

In Wenzhou, it is estimated that 70% of SMEs are involved in real estate in some capacity or have considerable financial exposure. A July 2011 report from the PBOC Wenzhou branch office said close to 90% of Wenzhou households and 60% of businesses were participating in private lending to the real estate market to the tune of ￥110 billion; 40% of private lending never reached the manufacturing sector. At the time, real estate supply was limited, which led to prices briefly exceeding those of Beijing and Shanghai as capital poured in.

In 2010, the Wenzhou government also stepped up land sales. Many businesses saw an opportunity and entered the real estate development business. Behind each company were dozens, if not hundreds, of investors. Everyone was getting involved, for example a valve manufacturer might borrow ￥50 million for business purposes, but only ￥20 million made it to the factory, the other ￥30 million went to purchase land.

Mutual Guarantees a Contagion Vector

Many firms also viewed real estate as good collateral, much in the way copper and steel traders acquired metals purely for obtaining bank credit. Once real estate prices fell, this collateral went from expanding a firm's credit limit to shrinking it. Those holding real estate for its monetary properties, who held because it was collateral that appreciated in value, dumped properties once prices fell.

Many Wenzhou firms are tied to one another through various cross ownership, lending, credit guarantee and other relationships, as is the case in many cities in Zhejiang province (and the rest of China). When one firm goes down, a number of other companies are put in financial distress. The result is that while the real estate bust started in 2011 and may be close to bottoming out, the economic domino effects are still going strong.

Local government is often stuck trying to sort out the mess. One official working on these cases provided an example (the case at the top of the pile). A shoe manufacturer owes more than ￥100 million yuan and more than 10 firms have provided credit guarantees; some of those firms are also in financial trouble. This case is actually an easy one; the official says they've recommended the firm sell some assets to repay debt. Government support is limited, mostly the government will fight for bank support based on actual circumstance and lead the parties to an agreement.

Bad Debts Mount

One company provides emergency lending at 4 times the official interest rate, but the firm is very cautious about lending to Wenzhou companies. As soon as the bank decides to pull credit and goes to court to collect, the emergency lender's money is not coming back.

In 2011, Wenzhou's NPL ratio was 0.37%, the lowest in history (at the peak of the real estate market). Since then it has been rising steadily. At the end of March 2014, bad debts were more than ￥33 billion and the NPL ratio has climbed to 4.52% (this percentage is likely suppressed by various methods). That was up ￥11 billion and 0.12 percentage points from the start of the year. A large portion of bad debts are tied to the real estate sector.

Jingle Mail

Wenzhou has 218,600 mortgaged properties (including housing and commercial buildings), worth ￥407 billion. Some of these properties are being turned over to banks, such as a luxury property that sold for ￥6 million and is now worth ￥3 million, the owner unable or unwilling to repay the mortgage. An official from the Wenzhou SME Development Association said jingle mail appeared early in Wenzhou, but it is still occurring today.

As of July 2013, there were 595 cases of jingle mail, amounting to more than ￥400 million in debt. Of these, 15 were cases of individuals who stopped paying the mortgage, 580 were cases of business difficulty resulting in an inability to pay.

Auctions on foreclosed properties are not going well. On average there are 4.1 bidders and first round success is 5% (prices drop in subsequent rounds).

The city and banks are using several methods to resolve the situation, but the best support is elusive: a stable real estate market. The Wenzhou economy is starting to show signs of a recovery, but the problems caused by low real estate prices and the mutual guarantee network, fueled by credit guarantee firms, continues to put pressure on the financial system. The real estate market was showing signs of a bottom in late 2013, with sales and land turnover up sharply. Left to itself, the market may have recovered in 2014, but the national slowdown may be having an effect.

Isolated Case or an Omen?

Wenzhou is unique in that it has a large private economy— Wenzhou is the capital of entrepreneurship in China. This helped it become an epicenter of the credit bubble because there was mass participation by individuals and businesses. Wenzhou speculators often pop up in other cities buying up homes, sometimes floors or whole buildings at a time. They didn't learn their lessons either—Wenzhou speculators were in Baoding earlier this year. Other areas in Zhejiang largely reflect aspects of Wenzhou business and speculation, such as the mutual guarantees. Xiaoshan disctrict in Hanzhou has about two-thirds the population of Wenzhou and may be in a similar economic situation, see Rumored Mass Death of Companies in Xiaoshan. Mutual guarantees are also seen all over China, but it probably reached its greatest extent in Wenzhou where a much larger portion of the population is engaged in commerce and speculation.

Wenzhou's private economy may also be a large part of the reason why it alone experienced a major real estate bear market (excepting ghost cities) from 2011 to early 2014. That could be because it received less government support or because market forces were given greater room to work—both in blowing the bubble and in the later popping. The optimistic view is that Wenzhou is a more volatile microcosm of China. The pessimistic view is that it was merely early, and worse, that its private economy may have allocated capital more efficiently than elsewhere in China.


This post was a mix of commentary and translated material from this source: 温州楼市泡沫2011年起逐渐破灭 跑路跳楼现象频繁出现. I only went about 1/3 the way into the article, it goes on to detail the Wenzhou real estate market situation, as well as some disputes such as investors in a government development project in Lucheng district.