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UPDATED: October 24, 2011 NO. 43 OCTOBER 27, 2011
Wenzhou's Case of the Disappearing Bosses
The boomtown of private economy has been plagued by company owners running away to avoid debt

FINANCIAL STRAINS: Local residents pass empty office buildings belonging to Zhejiang Tianshi ELE Co. Ltd. The company is one of many small enterprises in Zhejiang to go bankrupt due to financing difficulties (HAN CHUANHAO)

Hu Fulin is one of China's top businessmen in the eyeglasses industry. His Center Group, one of the country's largest producers of eyeglasses, ranks first in both output and export volume of sunglasses. As top tier as Hu's business appears, Center Group's operations are anything but sound.

Media fervor and public discontent erupted on September 20 after Hu left Center Group's headquarters in Wenzhou, Zhejiang Province, on a business trip to the United States. Many feared he had "escaped" and would not be returning due to debt.

On September 21, some of Center Group's employees and creditors swarmed the company's office, demanding payment of salaries and debts. By September 25, the Administrative Committee of Ouhai Hi-Tech Area of Wenzhou, where Center Group is located, paid more than 9 million yuan ($1.41 million) in defaulted salaries for August and September for the 1,800 employees.

On October 10, Hu returned, calming fears that he was gone for good but admitting that Center Group was facing financial difficulties.

"Since the company has some problems of capital, I went to the United States to ask for help from my friends. Moreover, there are some receivable accounts from U.S. clients so I went to communicate with them for earlier payment of these debts," Hu explained.

There is speculation that Hu came back to China after Wenzhou government officials persuaded him with promises to help reorganize Center Group.

Whether the return was voluntary or coerced, the incident unveiled the predicament Wenzhou companies are facing. In Wenzhou, the cradle of the Chinese private economy, many companies must deal with huge debt burdens.

They quit

Last April saw the disappearance of three bosses in Wenzhou. Huang He, President of Wenzhou Jiangnan Leather Co. Ltd., left without notice; Yan Qin, boss of Wenzhou Portman Café, ran away, forcing the café's chain to shutter its shops across the city; Chen Fucai, President of Wenzhou Sanqi Group, fled because of debt problems.

According to Xinhua News Agency, from April to the end of September 2011, at least 90 company owners in Wenzhou fled, causing their companies to close. Twenty-six of those incidents occurred in September alone.

Bosses in Wenzhou are choosing to take to the road in large part due to heavy debt burdens—they cannot deal with creditors knocking at their doors. In late September, two bosses even committed suicide after being demanded to pay debts.

Most companies in Wenzhou are export-oriented. Since the yuan's appreciation has increased this year, together with shrinking international demand and rising labor and raw material costs, the year has seen profits dwindle for most Chinese companies.

Zhang Zhenyu, Director of the Office of Financial Work Leading Group of Wenzhou Municipal Government, said capital chains of many small and medium-sized enterprises (SMEs) are getting tighter, and the bankruptcy of one company will affect others, putting more strain on their capital chains.

"The heavier debt chains are wrapping private entrepreneurs like nets," said Luo Zhongwei, Director of Small and Medium-Sized Enterprises Research Center affiliated with the Chinese Academy of Social Sciences.

Pressure to borrow

Center Group once had a bank rating of A Level.

Hu once told the media that many bank heads in Wenzhou used to send greetings and gifts to him, often treating him to dinners and begging him to take out new loans. This helped foster Hu's plan to invest in new projects.

At the end of 2008, Hu cooperated with Wenzhou Zhonggui Science and Technology Co. Ltd. to invest in the photovoltaic industry. According to the Center Group website, photovoltaic products are expected to reach 600 megawatts by the end of 2011 and the annual output value will be 7 billion yuan ($1.1 billion). Center Group has invested about 700 million yuan ($109.9 million) in the photovoltaic industry.

Three years have passed but photovoltaic products haven't brought returns to the group.

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