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China is changing. Its miraculous growth is slowing. Wages are rising. The endless labor supply has reached its limit. It’s normal for economies to ebb and flow, but a more fundamental shift is emerging. This series explores that trend and the people for whom it's a daily reality.

China shoe factory woman
A factory worker glues leather shoes on a production line at the Kangnai shoe factory in the Chinese city of Wenzhou. Small business and factories struggle to survive in current economic conditions. (Mark Ralston /Getty Images)
China

In China, small business no longer booming

Wenzhou is a small coastal town in China with small business galore, but now loans have dried up and family factories are struggling.

WENZHOU, China — In a city that’s supposed to be the closest thing to paradise for private enterprise in China, the mood is surprisingly grim.

After years of easy loans and cheap labor, small-business owners in this prosperous coastal city of 9 million say they are facing strong headwinds: slowing export growth, rising worker costs and a drought of loans for anyone but the biggest businesses.

More from GlobalPost: China could trip on breakneck growth

With 400,000 privately owned firms, Wenzhou has long been renowned in China for its high concentration of entrepreneurs. To picture it, think less Silicon Valley and more late 19th-century Trenton, New Jersey.

Wenzhou is a sprawling, low-slung city dotted with thousands of small, family-owned factories that manufacture astonishing quantities of everything from buttons and bags to shoes, statues and eyeglasses — more glasses than any place in the world, in fact.

But all that could be shifting fast, as economic trends in China and the outside world have put Wenzhou’s small-business community under pressure.

Consider Zheng Pei Shen, 32, a slight, stylish man whose family owns and operates a small textile firm in Wenzhou. For the last five years, he and several relatives have built up a business exporting colorful, synthetic-leather coats to the Ukraine. But their hopes to scale up the factory have been thwarted by a lack of ready funds.

“If you have connections, you get things done. If you don’t, you can do nothing.” he says.

Lending in Wenzhou has dried up severely since a loan crisis rocked the city last fall.

More from GlobalPost: Wenzhou's warning sign for Chinese economy

Whereas small businesses could once easily get loans from the city’s bustling “shadow banking” sector, a rash of defaults and suicides by debt-ridden businessman has caused the system to collapse.

“Shadow banking” here involved private lenders who illegally — though sometimes with government officials’ involvement — loaned money to small or medium-sized businesses at high interest rates. Many firms in Wenzhou used this underground financing because commercial banks typically loaned only to state-owned companies or huge corporations.

But the shadow-banking loans turned out to be hugely risky — both for lenders and borrowers. In one case, a businesswoman named Shi Xiaojie was caught trying to flee the city to avoid her debts of over $125 million. In another, a well-known shoe manufacturer jumped off a 22-story building when he could no longer find financing to stay afloat.

Since then, despite Beijing’s attempt to create a pilot program allowing Wenzhou’s underground lenders to register as banks, small-business owners say it is still extremely difficult to get capital.

Lack of funds is not the only thing preventing the Zheng family factory from expanding. Like many others in Wenzhou, their factory is small, with 100 workers spread out over several rented rooms in a dingy side street that rings with the sounds of hammers and sewing machines. The facilities are ramshackle, with low ceilings, wooden stairs, and no marked fire exits, despite the fact that Pei Shen and his brother, Zheng Pei Tao, smoke constantly.

“It’s informal in every aspect,” Zheng Pei Shen admits, gesturing at the piles of coats on the floor.

In order to improve the facilities, they want to purchase their own land, but the authorities rejected their application.

“The government won’t approve us,” says Zheng Pei Shen. “It’s impossible for a factory of this size to buy land.”

Economic slowdown

Because of economic tremors in Europe, this year has been a down one for the Zhengs. In previous years, their sales have hit as high as 40 million yuan ($6.3 million). Over half of that business comes directly from the Ukraine, with most of the rest coming from Eastern Europe.

The older brother, 35-year-old Zheng Pei Tao, spends 11 months of the year in the Ukraine handling sales. He hired a private tutor to learn Russian, and hawks their jackets at an open-air wholesalers’ market in Odessa. When they reach consumers, he says, the jackets ultimately sell for $30 apiece.

Dependent as they are on exports, the Zhengs closely watch the value of the yuan. In the long run, they expect that the Chinese currency will continue to rise, cutting into their overseas orders, so in the meantime they are trying shift strategically toward China.

Over the last year, a

http://www.globalpost.com/dispatch/news/regions/asia-pacific/china/120718/china-wenzhou-small-business