In June, three factory bosses in the entrepreneurial city of Wenzhou, China, confronted with debts they couldn't pay, disappeared without a trace. Spooked, the 'shadow banks' or lenders of last resort -- pawn shops, credit companies, even loan sharks -- started calling in their high-interest loans. More than 100 bosses are now in hiding or have fled -- and as China reins in spending and growth to fight inflation, the problem may get worse.
A commercial area in Wenzhou. After China's cradle of private enterprise was rocked recently by woes of its vast underground banking market, a full-blown debt crisis was averted; but the real test is still to come. Wenzhou came into the spotlight in the past month for the cracks appearing in its shadow lending market, where loan sharks and pools of depositors extend credit -- at high interest -- to small companies that have trouble getting loans from banks. (CARLOS BARRIA/REUTERS/CARLOS BARRIA/REUTERS)
A ferry crosses a river in Wenzhou. Ranked fourth-richest city in China, its impressive but spookily empty real estate projects make it feel larger than its population of three million. (CARLOS BARRIA/REUTERS/CARLOS BARRIA/REUTERS)
Red carpet is rolled up after the inauguration of a construction site in Wenzhou. Much of the Chinese government's recent stimulus package went into speculative real estate investments -- which is not what Beijing had wanted. (CARLOS BARRIA/REUTERS/CARLOS BARRIA/REUTERS)
A woman rides her bicycle in front of a closed factory in Wenzhou. Shadow banking in the entrepreneurial city has begun to alarm China's regulators, perturbed by media attention to a string of incidents involving corporate bosses running into hiding after failing to repay high-interest loans. (CARLOS BARRIA/REUTERS/CARLOS BARRIA/REUTERS)
A shopping area in Wenzhou. One of China's richest cities and a centre of entrepreneurship, Wenzhou has been rocked by enterprises closing when their owners cannot repay high-interest loans from an unregulated, shadow banking sector. (CARLOS BARRIA/REUTERS/CARLOS BARRIA/REUTERS)
Workers at Wenzhou's Sinoman Clothing Co. The company's owners are days away from having to repay a bank loan of 2 million yuan, money they don't have. 'There's no way to borrow from the banks, and no way to raise money on the private markets,' says founding partner Jin Yanzi. (YU MEI FOR THE GLOBE AND MAIL/YU MEI FOR THE GLOBE AND MAIL)
Workers on the production line at Wenzhou's Sinoman Clothing Co. When bosses flee from their creditors and shut down factories, the workers often don't receive their last paycheques, resulting in hardship and street protests. (YU MEI FOR THE GLOBE AND MAIL/YU MEI FOR THE GLOBE AND MAIL)
Wenzhou's Sinoman Clothing Co. China's slowdown from 10.3-per-cent growth last year to 9.1 per cent this year means the math of high-interest borrowing doesn't work any more, and has led to business failures and bosses fleeing often-shady creditors. (YU MEI FOR THE GLOBE AND MAIL/YU MEI FOR THE GLOBE AND MAIL)
Businessman Huang Fajing, owner of Wenzhou Rifeng Lighter Co. Ltd. The city's slowdown and debt problems are 'very similar to the collapse of Lehman Brothers in the U.S., it spread so quickly,' Mr. Huang said. (YU MEI FOR THE GLOBE AND MAIL/YU MEI FOR THE GLOBE AND MAIL)
Businessman Mr. Huang Fajing, head of Wenzhou Rifeng Lighter Co. Mr. Huang says some Wenzhou businessmen who have gone underground because of high-interest debts are still in the city, 'just lying on their beds, staring at the ceiling, surrounded by their creditors.' (YU MEI FOR THE GLOBE AND MAIL/YU MEI FOR THE GLOBE AND MAIL)
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