More Signs China Is Going Bust
By: Justice Litle
Sep 29, 2011
While the world fixates on Europe, signs of a China crash are mounting behind the scenes.
Imagine you run a business with 3,000 employees. Your factories churn out 20 million pairs of sunglasses per year — the best-selling brand in China. You are a celebrated businessman in your region, with expanded interests in real estate and solar energy.
Oh, and one more thing: You are flat broke.
As it turns out, your company borrowed huge sums at high interest — more than cash flow could justify — and you have no hope of paying the loans back. Now the business is insolvent. What do you do?
If your name is Hu Fulin, you run away.
“The east China city of Wenzhou is battling its own subprime crisis,” Shanghai Daily reports, “after seven local business owners fled.” Wenzhou, the “cradle of China’s private economy,” is China’s latest ground zero for a credit boom gone bust.
Hu Fulin is one of the seven “runaway bosses” who, faced with insurmountable debts, decided to hit the road this month, “leaving thousands of employees in a state of shock and enormous unpaid loans in hundreds of millions of yuan.”
When Mr. Hu disappeared, his suppliers panicked too. Large payments were owed, along with two months’ salary for thousands of employees.
The Wenzhou crisis is dubbed “subprime” because the state-owned banks pulled back, allowing private lenders to step in at sky-high rates. The loans being defaulted on had subprime rates of interest.
The Chinese government attempted to cool off reckless lending by putting restrictions on the state-owned players. All they accomplished was a juicy handoff to others to take on more risk, in exchange for subprime lending terms.
And the net result? Bosses fleeing as loans implode. “Thousands of employees in a state of shock.” A ripple of destruction all down the supply chain… and a possible tipping point in the whole Ponzi-financed boom that counts Chinese real estate as its white-hot center, as greed morphs into fear.
The Wenzhou bust comes against a backdrop of warning signs for China’s broader economy. The dragon had already lost a step, as evidenced by manufacturing data declines.