IN DIFFICULTY: A man works by hand at a private company whose electricity supply is limited in Wenzhou, Zhejiang Province (HAN CHUANHAO)

"In the past two years, solar energy has attracted a huge amount of capital, leading to surplus of production capacity," said Yi Xiuxin, Director of Corporate Management Department of the Administrative Committee of Ouhai Hi-Tech Area. With the European sovereign debt crisis intensifying and the global economy in decline, the government no longer gives subsidies to the industry, causing prices of photovoltaic products to fall steeply. With the failed investment in new energy, repaying the loans has become Hu's worst nightmare.

This year, the government tightened bank loans to deal with inflation. Hu had to borrow from private lenders with higher interest rates.

Several days after Hu left China, Center Group entrusted an accounting firm to liquidate its assets. The result showed that Center Group's debt totaled 1.3 billion yuan ($204.08 million), including 300-400 million yuan ($47.1-62.79 million) in private loans, 60 million yuan ($9.42 million) of accounts payable to suppliers and 800-900 million yuan ($125.59-141.29 million) of bank loans.

Lu Ruqing, Deputy Director of the Administrative Committee of Ouhai Hi-Tech Area, said the incident at Center Group was touched off by a loan of 14 million yuan ($2.2 million). Unable to borrow money to pay back the loan, capital chains of the group ruptured.

In Wenzhou, many companies, mostly SMEs, are facing similar financial problems. For lack of necessary mortgages and warrantors, they cannot obtain enough loans from commercial banks and have to borrow from private lenders. Against the background of macro-control and tightened bank loans, private lending is at an all time high. In the first half of this year, private lending totaled 48.55 billion yuan ($7.62 billion), with interest rates several times that of the bank rate.

Government rescue

The debt faced by SMEs in Wenzhou has drawn attention from government at various levels. On October 4, Premier Wen Jiabao held a meeting in Wenzhou to collect reports from Zhejiang Province and Wenzhou about SME development.

On October 7, the Zhejiang Provincial Government held a meeting requiring related government departments to solve problems for companies and prevent debt from further damaging businesses in the area.

Wenzhou was even swifter. On September 27 the city established a leading group on regulating the order of private lending and promoting economic transformation. The Wenzhou Municipal Government also sent 25 working groups to 25 city-level banking institutions, coordinating the banks to grant loans to SMEs. Various banks in Wenzhou also promised to lower interest rates and not to cut down on loans.

On October 9, the Wenzhou Municipal Government launched a package plan to rescue the SMEs. A temporary turnover fund of 200 million yuan ($31.4 million) for SMEs has been established. A similar fund established by the Wenzhou Council for Promotion of Small and Medium-Sized Enterprises has amounted to 900 million yuan ($141.29 million).

A report from China Securities Journal said Zhejiang Province and Wenzhou City plan to apply to set up Wenzhou as a trial zone for comprehensive financial reform to expand financing channels and bring new impetus to the economic development of Wenzhou.

On October 12 Premier Wen Jiabao held a State Council meeting, pledging stronger financial and fiscal support to small and micro enterprises. The State Council required commercial banks to strengthen lending to small and micro enterprises, especially those whose credit limits are below 5 million yuan ($785,000).

The meeting also required expansions to financing channels for small and micro enterprises, promising a greater issuance of collective banknotes, bonds and short-term papers and stable development of financing tools such as private equity and venture capital. The country will also promote construction of exchange markets and over-the-counter markets to improve the financing environment for small and micro enterprises.

Business in Wenzhou

Located in Zhejiang Province of southeast China, Wenzhou has the most developed private economy in China.

After China adopted the policy of reform and opening up, the private economy in Wenzhou set many records in China: In 1980 it issued the first certificate for individually owned business; in 1984, the country's first joint stock enterprise was established by 26 farmers; in 1986 China's first joint stock urban credit cooperative was set up; in 1987 the city issued the country's first local provisions on the administration of private enterprises.

Wenzhou's private economy features in commodities of low technology and costs and worldwide market networks. The pattern of low cost and low profit is an important reason for China to be the world factory.

Today, Wenzhou's leading industriesinclude electric manufacturing, shoes and leather manufacturing, plastic product manufacturing and dressmaking. There are 35 national-level production bases, 170 famous trademarks of China and more than 40 products of Chinese famous brands.