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http://atimes.com/atimes/China_Business/MJ01Cb02.html

HONG KONG - A lending crisis is brewing in the eastern Chinese province of Zhezian, after more than 20 company bosses have fled in recent weeks, leaving millions of dollars in unpaid loans linked to unofficial lenders, many of whom who get their cash from ordinary families.

Three of the runaway company heads each left more than 1 billion yuan (US$156 million) in loans unpaid, according to Zhou Dewen, chairman of the Wenzhou SME (small and medium-sized enterprise) Development Association. Among the absconders are a few recognized industry leaders such as Hu Fulin, 47, founder and president of the Zhejiang Center Group, one of the mainland's biggest spectacles makers.

Businessmen have been forced to turn to private lenders for help in the wake of tighter central government loan policies introduced late last year to fight inflation. The higher interest rates that are demanded by the underground lenders can become particularly onerous when the businesses do not run as well as expected.

Most of the company heads who have absconded were involved in manufacturing and had borrowed hundreds of millions of yuan from banks and private creditors. Wenzhou has about 360,000 small and medium-sized enterprises, producing a wide range of consumer goods - from shoes, cigarette lighters to spectacles - whose low cost has helped to make China the world's workshop.

Last Wednesday, Hu called the company's chief executive officer to say that he was unable to sustain the company any longer. He is now believed to be in the United States, according to the 21st Century Business Herald.

Hu's company was up to 2 billion yuan in debt, including 1.2 billion yuan from private lenders that attracted interest rates of more than 20 million yuan a month, and 800 million yuan at interest of more than 5 million yuan month, 21st Century Business Herald reported, citing an unidentified source.

Zhejiang Center Group, founded in 1993, employs 3,000 people and produces 20 million pairs of glasses a year. Hu is also involved in the real estate and solar power industries. He owes a total of 10 million yuan in employees' salary for their work in August and September.

Wenzhou businesswoman Zheng Zhuju was not so fleet-footed - she has been in police custody since the middle of this month on charges of running illegal business operations. Zheng, who owes 280 million yuan to private lenders and banks, had attempted to flee Wenzhou with hundreds of millions of yuan in cash, Shanghai Daily reported, citing local police.

Zheng, 49, ran a home appliance store chain and was the official licensee to sell products under the brand names of Siemens, Sony, LG and domestic brands Midea and Haier.

The difficulty of borrowing money from banks, allied to rising production and labor costs, is threatening the survival of many SMEs, prompting many to turn to private lending despite the high interest rates, said Zhou of the SME Development Association.

"Many SMEs have turned to private sources and even loan sharks, who charge up to 180% annual interest. However, most of the SMEs' profit is less than 10%, so borrowing from loan sharks would amount to 'attempted suicide'," said Zhou.

Since the beginning of April, many SME owners have disappeared after failing to pay back money they'd borrowed from underground banks. Among them is Huang He, the chairman of Wenzhou Jiangnan Leather Co Ltd. Huang closed down his factory without warning in April, owing billions of yuan to workers and money lenders, a spokesman for the Longwan district economic development zone (EZD) in Wenzhou confirmed to Asia Times Online.

In July, Jubang Shoes Industry Co Ltd, run by Wang Hexia, unexpectedly ceased production, owing 100 million yuan to creditors, the EZD spokesman said. Just a month ago, Ye Jianle, boss of Wenzhou-based Zhejiang Tianshe Electronics Co, was also reported to have gone to ground after failing to pay 70 million yuan.

Wenzhou Shoes Material Co ceased production suddenly on August 29. There has been speculation in the mainland media that he is in trouble with an underwriting company.

"All those businessmen had been involved in borrowing money from underground banks and they failed to return the money on time given the increasing interest," Xu Liangxi, deputy director of the Wenzhou Marketing Management Association, told Asia Times Online. "But the shame is such cashflow problems have suffocated the firms that have been in operation for 10 to 20 years."

Private lending in Wenzhou has been booming since the country started monetary tightening late last year to fight inflation. The central bank has raised interest rates three times this year, taking the one-year benchmark deposit rate to 3.5% and the one-year lending rate to 6.56%. The bank has increased the reserve-requirement ratio for commercial lenders six times, pushing the ratio for major banks at a record 21.5%, and 19.5% for smaller ones 19.5%.

Yet as defaults by borrowers in the underground market mount, private money lenders are wary of the increasing risk of lending money to SMEs.

"The collapse of the underground banks would be the worst consequence for the private money lenders and borrowers in Wenzhou. Many ordinary people lend money to private money lenders," said Chen Gongmeng, chairman of Wenzhou Strategic Investors Federation.

Chen asked for the state-owned bank loans policy to be loosened so that more money can be lent to SMEs at lower interest rates than those offered by the gray-market lenders.

In July, Wenzhou's underground banks processed 110 billion yuan, up about 40% from the 80 billion yuan processed in the same month a year earlier and equal to more than one-third of the city's entire 2010 GDP of 292.56 billion yuan, according to the Wenzhou branch of the People's Bank of China.

About 89% of families or individuals in the city and about 57% of enterprises had either borrowed from or made deposits to non-bank finance companies in last year's second quarter, the most recent figures available from the People's Bank of China.

Since Monday, workers at Hu's Zhejiang Center Group have been getting their unpaid salaries with the help of a workforce set up by the local government. a spokesman of the Ouhai district economic development zone in Wenzhou said, while declining to say where the money was from.

China Daily on Friday quoted unidentified government sources as saying a financial task force has been sent to probe private lending in Wenzhou.

Olivia Chung is a senior Asia Times Online reporter.