Sing Tao Daily, News Report, Posted: Oct 05, 2011

Increasing debts and high interest loans are causing small business owners to flee the city of Wenzhou, reports the Sing Dao Daily, adding the cost to the local economy is nearing the $3 billion mark.

The paper notes the growing phenomenon is beginning to impact the city’s economic health, adding that to date more than 90 such instances involving owners fleeing the city to avoid paying mounting debts have occurred.

Located in China’s eastern Zhejiang Province, Wenzhou experienced a rapid boom in entrepreneurship thanks to the country’s stellar economic performance in recent decades. But efforts to control inflation have led banks to raise interest rates, some by up to 30 percent, with high-risk loans carrying 60 percent rates.

Desperate for cash, many small businesses turned to private lenders after being turned down by larger banks, accepting loans that on average carry 30-50 percent rates. Unable to make their payments, many have opted to flee the city, while there have also been reports of suicides and a growing number of bankruptcies.

Looking to stabilize the situation, Chinese Premier Wen Jiabao brought a team of financial officials to Wenzhou on Oct 4 to meet with local small business owners. According to the paper, the group took the opportunity to express their frustrations.

Zhou Dewen, head of Wenzhou Small- and Medium-sized Enterprises Promotion Association, told Sing Tao that owners urged Wen to implement tax cuts to reduce operating costs, as well as offer financial support in the form of bonds, easier access to bank credit and more preferential tax policies.

Premier Wen assured the group that the government would work to resolve the situation within a month.

Apart from domestic financial challenges, China is also facing foreign challenges from US, who is in the process of passing a bill that would empower American companies to seek retaliatory tariffs on goods imported from countries whose currencies are undervalued, including China.