Wenzhou entrepreneurs' ability to access nonbank credit may have been one of the sources of the city's success, but it now threatens to bring the local economy down. And given the extent to which local entrepreneurs have invested throughout China, the shocks will likely be felt nationwide. Shanghai Daily calls the Wenzhou meltdown "China's subprime crisis."
For a while, business was very good for the Kid. His fund grew to $15 million at its peak. Borrowers were paying back their debts quickly. In one week in May, for instance, the Kid took in nearly $8 million in repaid loans and interest. Many of the borrowers were small-scale real estate developers who needed money to fund projects — but that's precisely why the Kid and others like him face problems now. Continued economic uncertainties and tighter mortgage policies have made property buyers increasingly cautious, and real estate sales have slowed dramatically. The people of Wenzhou "plowed their money into high-interest loans," says Victor Shih, a political scientist at Chicago's Northwestern University who studies China's financial system. "That was unsustainable because the high-interest loans went back into real estate projects. Eventually all of them will go bust."