Free Minds & Free Markets

China’s Black Market City

Welcome to Wenzhou, where the mountains are high, the emperor is far away, and people are busy creating their own economic miracle.

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

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  • Suki||

    “All the roads in this town were built by businessmen, so none of them make any sense,”

    Interesting quote. Glad Bradley points out that they make perfect sense to those who built them.

  • Suki||

    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.

    Until this story appeared. Countdown to the Red Army and bulldozer arrival . . .

  • Suki||

    Part of the motivation for these purchases is the high return on real estate in China, but the other major reason is that remortgaging real estate is a relatively easy source of capital in both the formal and informal banking systems.

    What do we call mortgaging property that individuals do not own here?

  • ||

    Bank loans.

  • ||

    It's in the English-language press, so ordinary Chinese won't see it - and it's probably blocked anyway - and the government makes more money when the people make more money, so ... no problem.

    BTW, the traditional formulation of the phrase is "Heaven is high and the emperor is far away", though a more literal interpretation is "Heaven high Emperor far."

  • Suki||

    So, the government that owns all the tanks and guns will see it, but the victims won't.

  • Suki||

    BTW, English is the most popular second language in China.

  • ||

    You dumbass!

    Seriously, look up Jiangsu vs Zhejiang. Jiangsu and Zhejiang are two countervailing examples, adjacent and very similar when it comes to society and economy. Zhejiang took a more private-sector based approach to economic growth, whereas Jiangsu took a more state-lead approach to economic growth.

    CPC (Communist Party of China) promotion is based on the economic growth of villages, cities, and provinces. When the apparatchiks in Jiangsu saw that Zhejiang was doing better than they did, they dropped what they were doing and started encouraging private sector growth so they could increase their chances for promotion and rent-seeking.

    Wenzhou, as others have said, is likely to suffer the main issues of a laissez-faire approach to growth. It may be extremely successful in the short run, but the fact that there's no centralized coordination and critical control of the local economy means that it's necessarily fragile.

    Businesses seek short- and mid-term profits. They don't see the long-term problems enforced by their own decisions, and the search for greater immediate efficiency creates risk and fragility in their economic system.

    This fragility is what is threatening Wenzhou's success; they are over-leveraged, moreso than other Chinese cities, and when a banking run occurs they're in deep shit.

    If you have been reading the actual news, the Chinese government is finally stepping into Wenzhou to extend credit to the private sector in an attempt to stabilize the debt situation in China. Without government intervention, with a true laissez-faire policy, Wenzhou would be toast.

  • hal||

    So, is the banking system laissez-faire?

  • a Washington, D.C., driver||

    Roads built by government planners always make perfect sense.

  • ||

    You drive in DC?!? Driving in the 'burbs I can understand. I will never understand driving in DC proper.

  • tarran||

    There are some people who are very motivated by envy that thing that freedom leads to the rich getting richer and the poor getting poorer.
    Once again, we see their fears are unfounded. Freedom leads to a growing class of bourgeoisie.

  • ||

    I understand your concerns but these reports may be overblown. The truth is that theft (and murder) occur for the sake of many commodities - everything from automobiles to iPods. In China at least there is a free(er) market in organs which allows people who desperately need organs the ability to get them.

  • Forgettable Paul||

    At least they have free healthcare.

  • ||

    Young Jewish Man: Rabbi, may I as you a question?
    Rabbi: Certainly, my son.
    Young Jewish Man: Is there a proper blessing for the Tsar?
    Rabbi: A blessing for the Tsar? Of course! May God bless and keep the Tsar... far away from us!

  • ||

    Nice read, incredible that karaoke parlors are technically illegal still.

  • ||

    Totalitarian governments don't like places that people can gather in mass. The people could talk politics there and the government can't have that.

  • ||

    Now, about that liquor license for the bar you wanted to open...

  • ||

    They are generally illegal because they tend more often than not to be covers for prostitution. The government (local and national) tend to tolerate this until they need some headlines (every few years) showing government cracking down on corruption and moral vice

  • ||

    This was a very interesting article.

  • ||

    Agreed. More like this please Reason.

  • ||


  • ||

    Don't get too excited about Wenzhou. Much of its growth has been the result of China's more general banking and credit expansion which has led to a very large real estate and infrastructure bubble. While I applaud the spirit of the people of Wenzhou (just as I would of the spirit of the US finance industry), government driven credit expansion results in malinvestment: that could be in MBS in the US, or the property market in Wenzhou. People react to incentives and price signals, when those incentives and signals are distorted by the government the result is never good

  • Forgettable Paul||

    But will they be free to fail?

  • ||

    I would also like to add that I would like to see more articles like this in Reason... great piece.

  • ||

    OK, the writer wrote this 2 months ago, and most likely did the research 4 months.

    At the moment there are stories of Wenzhou businessmen fleeing abroad to get ahead of creditors. Right now they are going through some tough times.

  • ||

    Yes some very tough times are ahead for China. The export model of China is simply unsustainable, many of their industries would have negative margins if it weren't for goverment funding. Not to mention most of the recent growth that China has had has been because of a flurry of goverment 'investment' in infrastructure and ego-penis projects, many of which will have a negative ROI. Coupled with a property bubble, and a goverment that is getting more and more involved in the business sector, not that they weren't heavily involved to begin with. If you do some research you will find that the chinese state has a ownership hand in almost ever major business and industry over there.

  • ||

    So, now, there's a better place than Somalia that libertarians can be told to go?

  • ||

    Yes, but unfortunately Tom Friedman and The Truth will be there.

  • ||

    For an example of how truly screwed the situation is in Wenzhou, see the following:

    There are multiple stories out there. I read the Hong Kong Chinese language papers, they have been talking about Wenzhou for over a year.

    This is not particularly good reporting. Sort of like a story on what a great boat the Titanic was the day before launch.

  • ||

    Andy Xie in CaiXin has been writing about the massive expansion in Chinese money supply over the last 4 years. Here is the latest

    The wheels of credit turned faster in Wenzhou because the people are (admirably) entrepreneurial - that does not change the inevitable effect of malinvestment. Wenzhou is a terrible mess because China has been awash in a mountain of money; property values have exploded and people deployed that wealth by making private loans in the grey market to private companies which, putatively, were making shoes or compressors, but were investing in property. Like a circular firing squad.

    Look forward to the update of the story on Wenzhou next year after the crash

  • ||

    Google Translate:
    Lack of fear of bankruptcy
    At 16:24 on November 11, 2011 article from the wealth of new "New Century" Subscribe "New Century", "China's reform" | Registered financial new network
    Now is the structural adjustment, cleaning up inefficient enterprises the best time. If the Government rescue again, China will enter the hyperinflation

    China's economic restructuring has only just begun. Many enterprises are facing liquidity crunch. Pressure may be even greater next few weeks. Many people will be asked to relax monetary policy, under the pretext that a number of corporate bankruptcies will lead to rising unemployment, social unrest. This view is wrong. China is undergoing a structural labor shortage. Bankruptcy due to unemployment will be absorbed within a few months.

    China's inflation cooled bankruptcy, real estate bubble burst and the economy to balance the inevitable result. If the Government is under pressure to intervene, tightening will eventually nothing. Inflation and the real estate bubble will become more troubled by China's economic monster.

    Too many companies and banks to take hostage the government hostage and profit policy. Government was forced to again and again to rescue debt by printing companies. This makes the economy inevitably occur eventually hyperinflation. In fact, when companies make high interest loans, the hyperinflation that they want to see.

    Adjust the start

    Ease monetary control of inflation has begun to affect the real estate industry. Some companies to reduce prices to increase sales. This is a healthy sign. China's real estate market is experiencing a price bubble, the price adjustment is necessary.

    There are many real estate developers, not by a sale, but outside the banking system through high-interest loans to linger. Now buyers are likely to accept the prices are already lower than the survival of these developers to maintain prices. Therefore, they are massive debt, no matter how high interest rates, just want to be able to recover with the market turning around.

    Economy slowed in the third quarter, mainly due to sluggish exports and local government projects and real estate developers to tighten liquidity. Electricity consumption growth rate slowed to 9.8% in the second quarter was 12.3% in the first quarter was 12.6%. In September, electricity consumption growth rate fell to 8.5%.

    Growth may be slowing down in October. Construction steel prices fell from recent highs of about one-tenth. Power consumption is likely to slow further than September. Tendency to slow down in the next few months may continue.

    So far, the slowdown is relatively modest. Three quarters of nominal GDP growth rate of 17.5% in the second quarter was 17.2% in the first quarter was 18.3%.

    Although more pronounced decline in the fourth quarter, resulting in the widespread fear of a hard landing for the economy, China's economic slowdown is inevitable and healthy, can be absorbed. Some enterprises in the economic downturn period of bankruptcy is healthy. If there is no bankruptcy to clear the accumulation of chronic illness in the bubble, the economy can not move forward, to create another growth cycle.

    Despite the decline in sales, real estate developers through high-interest loans and vendor financing, or support down. Equipment, raw materials suppliers and construction companies has become a source of financing, because it can more easily obtain credit from banks. Banking system did not increase the industry's loans. The real estate industry, the shortage of funds may be more than 2 trillion yuan. Supplier of high-interest loans and financing to fill this gap now.

    Bankrupt builders probably began in the beginning and building materials suppliers. In fact, they are just high interest creditors developers, their profits from financing rather than more services.

    China's private enterprises often provide loan guarantees to each other. When a business problem, many companies are likely to be involved, a terrible complications. However, the actual assets are easily valued. When following the bankruptcy of some enterprises from other companies over its tangible assets, keep the economy booming, not difficult. Should not use taxpayer money to rescue reckless speculators. To reduce the supplier is a creditor of the bankrupt real estate developer, who must cut prices to increase sales.

  • John Spiers||

    A more standard form of getting a loan, he explains, is borrowing from a contact…who also happens to be lending to a large number of other entrepreneurs at interest. Weng contemplates this arrangement, then admits that the whole thing might be “somewhat illegal.”

    This is either a back to back LC or factor-financing, which is pretty common in free markets...

  • AMB||

    This is a fantastic article. I'm extremely interested in the fact that it seems like China's gray markets are booming while China's official markets are headed for a bubble. China "on paper" is a VERY different economy from China on the streets.

  • ||

    China "on paper" is a VERY different economy from China on the streets.

    True enough, but unfortunately the "on paper" China controls the money supply. If there is a crash coming, the grey markets are going to be swept away along with the white markets.

  • ||

    i live here in china and wenzhou is definitely heading towards the shitter right now. this article is way too rosy. he's right about them being famous for being rich though. if a person here in beijing meets someone from wenzhou they automatically assume they are rich.


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