Massive Wenzhou debt might wreck Chinese financial reforms

Court cases on private financing jumped to 20,000 in 2012.

Unpaid private debt in Wenzhou has risen to some US$16 billion, threatening to scuttle banking reforms being instituted by Beijing. It could also be troublesome for Wenzhou’s financial reforms aimed at providing financial relief to thousands of the city’s struggling businesses.

Among these reforms is a joint information platform that allows communication between banking and finance-related organizations, enabling the intermediate court to monitor and identify illegal financial practices.

The reforms intend to provide relief to the city’s factory owners. Many of these businessmen have faced major financial troubles and have been forced to shutter their their businesses, leaving their debts unpaid.

In 2012, the Intermediate People’s Court and High People’s Court of Wenzhou handled 20,000 cases related to private financing involving US$3.5 billion and settled 5,000 cases related to disputes over financial lending agreements.

Some Wenzhou officials said that if all outstanding debt cases in the city were known, the numbers could be far higher.

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