WENZHOU, China—The mystique of Wenzhou—the birthplace of China’s private wealth sector. Entrepreneurs have conspicuously consumed Dior, Bentley, Bottega Venetta and brands that are prolific but unknown to wealth as a result of geography and awareness.
This seaside city spearheaded Chinese manufacturing, building export industries around cigarette lighters, plastic pens and shoes, and transformed itself into a seedbed of investment capital. Its nouveaux riches captivated the rest of China with their special brand of unapologetic and conspicuous consumption, whether they were buying Shanghai apartments, Shanxi coal mines or French wine.
Traditionally a system for channeling friends-and-family money, the shadow financial system has begun to unveil itself. IHS Global Insight analysts estimate Wenzhounese control capital of 800 billion yuan (about $126 billion), or 2% of China’s 2010 gross domestic product.
City of Commerce …Wenzhou’s long legacy of trade and development:
- 1876: The Qing Dynasty is forced to open Wenzhou to foreign trade.
- 1978: Business in Wenzhou is already under way when Beijing signals first economic reforms.
- 1979: A cluster of button-making begins in Wenzhou
- 1980: A Wenzhou woman gets China’s first small-business license for her store—a tabletop.
- 1991: Wenzhou is named one of 14 special economic zones in China; local authorities propose a stock exchange.
- 1991: Local entrepreneurs found China’s first private airline.
- 2001: Wenzhounese pour money into Shanghai property, helping spark a national frenzy of real estate investment.
- January 2011: Wenzhou authorities propose individuals can invest up to $200 million abroad each year, but the measure is delayed by Beijing and those interested in reviewing policy and effect of the measure.
- February 2011: A Wenzhou business group says a majority of its smallest members are having cash-flow challenges but larger manufacturers lead the continued economic development.
- January 2012: Wenzhou based exports continue world dominance from massive oil rig piecework in the durable goods category, motorcycle parts, consumer goods and designer apparel.
- March 2013: National news reports a resurgence of the investment outreach program for Wenzhounese.
- April 2013: USA based business consultant William Sickert begins initial alliances for international relations between USA businesses and Wenzhou based commerce members.
- May 2013: Announcements for an official business expo are slated for mid June 2013 once contracts are authorized for staffing and development of the show.
China approved a broad package of financial reforms in Wenzhou, a city known for entrepreneurship and underground lending, in what may be a prelude to a national effort to liberalize China’s financial system.
The move by the State Council, China’s cabinet, represents an important symbolic step toward overhauling a system long seen as a barrier to developing a more substantial and sustainable growth model for the world’s second-largest economy.
In a statement, the State Council said it would allow private lenders in Wenzhou, whose legal status has been in limbo, to operate as investment companies to augment the financing available to small and medium-size enterprises. Smaller companies have long complained they have been starved for funds because China’s giant state-owned banks favor other state-owned enterprises, whose ability to repay is considered guaranteed by the cash-rich Chinese government.
The city known for its entrepreneurs has often been at the forefront of China’s economic evolution.
- 1876 Qing Dynasty forced to open Wenzhou to foreign trade
- 1980 Wenzhou authorities grant China’s first private business license to a Wenzhou woman
- 1984 A Wenzhou boot factory becomes China’s first joint-stock company
- 1988 China formally recognizes the legality of privately owned enterprises
- Early 2011 Wenzhou government tries to let locals invest overseas, but lack of consent by the central government sinks the move.
- 2011 Premier Wen Jiabao vows support for small businesses cut off from credit
- 2012 State Council approves financial reform measures in Wenzhou
In addition, the State Council said it is studying allowing Wenzhou residents to invest directly overseas, giving them a way to earn better returns than in Chinese banks, whose deposit rates frequently lag inflation.
Under the investment proposal, residents in Wenzhou would be allowed to spend up to $200 million a year—or as much as $3 million a person—to set up, acquire, or invest in nonfinancial companies in foreign markets. Wenzhou residents would also be able to reinvest abroad any profits generated abroad. Still, there could be “revisions” in the details pending the State Council’s approval, said Su Xiangqing, head of the Wenzhou Bureau of Commerce.
The move comes amid increased calls both inside and outside the country for change, with Chinese Premier Wen Jiabao himself telling a news conference that China’s informal finance system “has still not adapted to the development of our economy and society.” Elsewhere, the World Bank and a Chinese government think tank in February called for scaling back state-owned enterprises. Meanwhile, newly appointed securities regulator Guo Shuqing has been pursuing wide-ranging changes in China’s stock and bond markets.
USA business consultant William (Bill) Sickert recognizes massive opportunity in the transition. “The US news and financial districts constantly purport their own monolithic viewpoints when they criticize other countries economic changes… when, in essence, the US markets have had multiple downturns including the depression and the far reaching downturn of 2008”.
The Wenzhou approvals are “very significant,” said a senior executive at a large Chinese bank. “Right now, China’s banks are ill equipped to lend to small- and medium-size enterprises partly because of a lack of expertise in assessing risks.”
Some business leaders in Wenzhou welcomed the moves. “Formalizing private lending can help us reduce funding costs,” said Qu Guoning, who runs one of the hundreds of small makers of electric wires and cables in Wenzhou and has been fretting about how he will fund a planned business expansion.
Mr. Qu said he is planning to expand his business into making household appliances, a line of business that promises greater profitability but would need “tens of millions” of yuan in investment. Bank financing, he said, is difficult to get.
It is unclear how big China’s underground lending might be. In October UBS estimated it could be between two trillion yuan and four trillion yuan in total, or $316 billion to $632 billion. The process of legitimizing informal finance could involve giving existing underground lenders a license to operate as small-loan companies while imposing deposit collection requirements, experts say.
Eswar Prasad, a China scholar at the Brookings Institution, said that the government is concerned that the informal banking sector has been gaining so much steam that it could “pose risks to overall financial stability” by eating away at the depositor base of the big banks. That’s why, he said, “They are taking steps to bring these informal banks under the regulatory umbrella.”
There was no indication from the State Council statement that the government was yet ready to move on interest-rate liberalization, even though central-bank Gov. Zhou Xiaochuan said recently that the time was “basically ripe” for such a move. The People’s Bank of China reports to the State Council.
Early last year, the Wenzhou government proposed to give its locals more freedom to invest overseas, only to suspend the move due to a lack of consent by the central government. Wenzhou officials then worked out a new proposal—similar to the original one—and submitted it for approval as part of the broader plan to make the city a testing ground for financial reforms.
Chinese officials are buffeted by crosswinds. On the one hand, some in the State Council worry about large capital outflows as the economy slows. On the other hand, the central bank is continuing its drive to encourage Chinese businesses to invest overseas as part of its effort to diversify its $3.2 trillion worth of foreign-exchange reserves, by far the world’s largest.
Wenzhou, in Zhejiang province, drew attention to the funding pressures faced by China’s private sector last year when Beijing tightened monetary policy, making it harder for the city’s small companies to get credit or roll over loans.
In China’s traditional financial system, banks play the dominant role and interest rates for savers and borrowers are set by the state. That model, designed to shovel low-cost credit from households to state-owned firms, works well to finance investments in infrastructure and capital-intensive industry.
USA Based business consultant William Sickert sites a conservative optimism and credentialed opportunity to bring business and investment together in a holistic manner. Traditional approaches have focused on employment and job creation as success markers for foreign investment. Sickert calls the approach “worthy but myopic”. As a champion for brevity in explanations, Sickert says “The US small business investment and lending model is fatally broken for three fundamental reasons. Venture capital is over protective; the business usually sells out to the VC due to loss of control or inherent toxicity in the program. Banks lend from a secured lending model whereby business owners walk away after the requirement of signing virtually their entire asset base over to the bank for a discounted amount of money. International sources require relationships that were historically difficult to develop.”
Sickert continues; “We give the investor what they need to see in the international language of math. Financial modeling that drives third party valuations. Nothing against 90 page PPM’s; they simply do not translate to the foreign investment opportunity. Companies that pay for this process are fundamentally credible because they have a tangible value proposition.”
William Sickert is a fiscally responsible executive with a significant and successful track record in start-up and market development. His unique combination of formal Business (BSc.), Legal (JD) , Nutrition (CNC) and Marketing education as well as his insurance credentials earns him the respect of investors and business associates. Bill has a 25 year executive history in the medical, home health, post-acute rehabilitation and medically fragile child care coupled with a nutraceutical product delivery including executive positions with industry leaders PhytoPharmica, PENTA Water, Enzymatic Therapy, Barleans Organic Oils, Garden of Life and Frutaiga.
Yang.Jie, James.Areddy and Lingling.Wei of WSJ.com contributed to this article.
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