Growing debt in Chinese city of Wenzhou could derail financial reforms

125px-Flag_of_the_People's_Republic_of_China.svgAn increasing number of debt cases brought before courts in the Chinese eastern coastal city of Wenzhou could hinder financial reforms aimed at providing financial relief to thousands of the city’s struggling businesses.

Last year, the Intermediate People’s Court and High People’s Court of Wenzhou handled approximately 20,000 cases related to private financing involving approximately $3.52 billion and settled more than 5,000 cases related to disputes over financial lending agreements, China Daily reports.

Some officials, however, said that if all outstanding debt cases in the city were accounted for, the numbers could be much higher.

“Adding in the number of cases filed with local courts and other ongoing disputes, the scale of private debt being left unpaid in the city is estimated at more than [$16 billion],” Xu Jianxin, the head of the intermediate court, said, according to China Daily.

The city’s growing debt concerns could be troublesome for Wenzhou’s financial reforms. Last week, Chinese officials announced the launch of a joint information platform that allows communication between banking and finance-related organizations, thereby enabling the intermediate court to monitor and identify illegal financial practices.

The reforms are geared at providing relief to the city’s factory owners, many of whom have faced increasing financial troubles and have been forced to close their businesses and leave debts unpaid. Xie Rongfang, the executive president of the Wenzhou Shoe and Leather Industry Association, said that many of the organization’s members were unable to obtain loans after sustaining losses last year, leading many businesses to close or halt production, China Daily reports.

Wenzhou’s financial plan involves the channeling of private sector funds to regulated lending organizations. The city government has also established Wenzhou SME, a private lending registration center, to limit underground lending and meet the needs of borrowers and lenders.

“It was unfair that the government offered instant assistance only to large-sized enterprises, which didn’t really need it, while the majority of SMEs are still struggling without benefiting from any financial reforms directly,” Huang Fajing, the vice president of the Wenzhou General Chamber of Commerce, said, according to China Daily.

Some economists have also called on the government to be tougher on failing businesses.

“Clearing the decks and starting again with a new financial order would be a far better solution for enterprises,” Ma Jinlong, a former director of the Wenzhou economic research center, said, China Daily reports.

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