Chen Mingyuan has lived here all his life, but he still gets lost every time he drives into Wenzhou. “All the roads in this town were built by businessmen, so none of them make any sense,” Chen says as we back out of what we just discovered is a one-way street. For the last 30 years, private citizens in this southeastern China metropolis have largely taken over one of the least questioned prerogatives of governments the world over: infrastructure.
Driving down the cluttered and half-constructed streets of this 3-million-strong boomtown requires frequent U-turns and the patience of Buddha, but every road eventually leads back to a factory. Each factory is in turn surrounded by a maze of roads filled with hundreds of small feeder shops selling spare parts, building materials, and scraps. Every haphazard street in this town seems to have an economic purpose.
We are driving to see Cai Shuxian, the manager and majority owner of a clothing factory in which Chen owns a 10 percent stake. Cai, a lightly built 32-year-old, is typical of the entrepreneurs who have made it big during Wenzhou’s three-decade boom, vaulting from shop-floor grunt to factory owner in a dizzyingly short period of time. “We earned very little in those days,” the high-school dropout recalls of his first job, “about 600 yuan [roughly $100] a month.” Within six years Cai was able to leverage his money and know-how into building a factory of his own, which now employs more than 100 people.
Cai glides over the source of his start-up capital, although it definitely was not one of China’s state-owned banks. “Banks only give you money when you don’t need it,” he says. He explains that during the 2009 financial crisis, when banks were aggressively lending as a form of stimulus, people would reinvest the money in Wenzhou’s underground financial system, where deposit interest rates are higher than the official lending rate.
Cai says his Horatio Alger story is “typical of Wenzhou.” And it is. Only a few days later I am introduced to the manager of a factory making transmissions for South Korean cars. Although he had the advantage of finishing high school, his starting salary wasn’t any higher. Cai’s dismissive attitude toward the government is also typical. Wenzhou has become one of the richest cities in China under a regulatory regime that borders on anarchism.
The Wenzhou Model
Foreign businessmen, politicians, and journalists who fly into Beijing or Shanghai often get the impression that the Chinese government is the main driver behind the jaw-dropping development of what was until recently one of the worst large economies in the world. In Shanghai you fly to a state-built airport, ride on a state-built maglev train through the Pudong district, and behold a city of skyscrapers that appeared out of nowhere a little more than a decade ago with the help of generous government subsidies and investment from state-owned enterprises. Whatever local company you’re interested in, chances are the government is interested in it as well.
In southern China, things look rather different. The Chinese say that in this region “the mountains are high and the emperor is far away”—in other words, the government isn’t paying much attention. Companies are mainly small or medium-sized enterprises, government services are slight, and laws are routinely ignored. According to official statistics, the three southern coastal provinces of Zhejiang, Guangdong, and Fujian have the first, second, and fourth wealthiest citizens, respectively, in the country. They are the center of China’s export sector and the primary destination for China’s millions of internal economic migrants. Here is where the real Chinese miracle is happening.
The city and region of Wenzhou play an important role in this story. The Wenzhounese have a reputation for both an uncanny sense of business and an almost pathological disregard for the government. The mountains here are no metaphor: Seventy-eight percent of the Wenzhou prefecture is covered by mountains, a fact that proved pivotal to the area’s early development and the central government’s response to it.
In 1978, when China’s economic reforms were just being launched, Wenzhou was extremely poor, about 90 percent rural, with smaller land allocations than other areas and poor connections to larger markets. Even today, the vast majority of local entrepreneurs have less than eight years of formal education, and the current population of foreigners is estimated at only a couple of hundred. The Wenzhounese government received directives from Beijing but found that without accompanying support they lacked resources to run the economy by diktat. Fortunately, a central government that wasn’t offering much support also wasn’t paying much attention.
So private citizens quietly took over many of the services that elsewhere are either provided or heavily regulated by the state. Local authorities, lacking other options, didn’t try to stop them. The most important development in those early days was the city’s flourishing underground financial system, which according to the local branch of the People’s Bank of China (China’s central bank) currently is used by 89 percent of Wenzhounese private citizens and 57 percent of local companies.
More dramatically, private citizens were the first to connect Wenzhou to neighboring regions by building roads, bridges, and highways, as well as the city’s airports and substantial portions of the dock. Even today the city is scattered with infrastructure investment firms through which groups of businessmen pool money to build the transport routes they all need to get their goods from factory to the point of sale. The result is not pretty. Aside from the confusion faced even by residents driving into the city, it is not uncommon to see sidewalks torn up to insert piping, with seemingly no intention of replacing the concrete. Nevertheless, the system is crudely efficient, merchants can all easily access factories, and the factories in this geographically isolated city now have sales networks that span the globe.
The government’s indifference didn’t last forever. But when the authorities got around to paying attention, they decided not to mess with a good thing. In 1985 Liberation Daily, a paper sponsored by the Shanghai Communist Party, referred to Wenzhou as a “model” for other parts of China to study. In the next year 15,000 government officials visited the city to learn, not crack down. Although bureaucrats still occasionally try to impose state controls on the city, the futility of the effort quickly becomes apparent. By now the local Chamber of Commerce has taken to negotiating trade deals both domestically and internationally because, as in most other things, the private sector is more effective here.
Today Wenzhou is the center of China’s light manufacturing empire and the richest city in China’s richest province. (Nationwide, Shenzhen, Shanghai, and Guangzhou narrowly edge out Wenzhou—in the official figures, at least.) A quick walk down a Wenzhou street reveals a bewildering display of commerce. The streets around the railway station are covered in stalls selling $3 blue jeans and $5 boots. There’s a city block dedicated to baby clothes next to a street that sells plastic signs for bathroom doors. In one run-down alleyway you’ll see people repairing televisions, making blankets, and selling fruits, vegetables, and poultry (live or dead). Further outside the center, you can find small shops dedicated to aluminum rods, sheet metal, tire rims, and tires.
Much of this low-level commerce depends on the same official negligence that fuels the factories. Pool halls are set up wherever there’s open space that you can set a tarp over. Gambling dens are openly advertised. Taxi drivers often drive off the meter. The karaoke parlors are numerous, and almost all of them double as brothels. The poorest residents take part in one of the largest citizen recycling programs anywhere in the world. In an alley one family collects scraps of fabric to sell to the local textile mills, another hoards scraps of paper and cardboard to send to the paper mills, and in front of a lot that looks like it is being used for a garbage dump, a man has set up a secondhand goods shop.
Unskilled workers in Wenzhou are paid one of the highest wages in the country, roughly $380 a month according to official figures (even higher—between $450 and $600—according to entrepreneurs’ estimates). It is here that people like Cai make their fortune.
Medicis on the Yellow Sea