A light word in the temple is the long life of countless ordinary people below.
How should we measure the fate and lives of a generation, or even several generations? Some have stepped out, while many others, along with their children, have been swept away by the torrent of history. When looking back at history, perhaps we should slightly cast aside the obsession with "higher, larger, and stronger," and try to survive from an ordinary perspective. GDP is just a number; change is the transition of people and things, the continuously declining economic growth rate, the aging population arriving early due to the family planning policy, and the mass relocation of industries caused by labor costs... For policymakers, looking back at history is also a record of history itself.
"Overcapacity," "supply-side reform," "transformation and upgrading"—these seemingly lofty and empty terms only gain meaning when they land in the real world, happen around us, and concern our friends and family. What are the economic laws of industrial development?
"Overcapacity" is one way of recession. "Supply-side reform" and "transformation and upgrading" are key to extending the industrial lifecycle.
Zhejiang is most famous for its small and medium-sized enterprises and industrial clusters; almost every small place has its own golden signboard: by 2005, the sock industry in Zhuji, small commodities in Yiwu, buttons in Yongjia, and ties in Shengzhou accounted for 65%, 70%, 85%, and 90% of the national market share, respectively, while Wenzhou lighters accounted for over 80% of the global market share. There are also hardware in Yongkang, light textiles and chemical fibers in Shaoxing, leather and clothing in Haining, and fine chemicals in Taizhou...
For the people of Zhejiang, "industrial clusters" and "block economies" are not illusory terms but tangible benefits. My hometown is located at the intersection of the eastern Zhejiang basin mountains and the northern Zhejiang plain, with little arable land, no port, and relatively scarce natural resources. After the 1980s, the plastic mold industry gradually became an industrial cluster in our area. From 2005 to the present, the plastic sales in my hometown have long accounted for over 10% of the national total; in 2015, the plastic trading volume was about 10% of the national total, with the plastic industry sales accounting for about 7%. Although most people may know little about my hometown, its name is well-known in the plastic mold industry. Since 1999, the China Plastics Expo has been held in our county for 17 sessions. Each time, the scene is bustling, and it is hard to find a booth for exhibition and sales. During the expo, several five-star hotels in the city need to be booked more than a month in advance and do not offer any discounts.
Like most private manufacturing industries in China, the enterprises in Zhejiang's industrial clusters are mainly labor-intensive, highly specialized, and characterized by a large number of small-scale operations. As a result, there are naturally many "bosses." Friends' parents who own factories or have real businesses, regardless of size, are respectfully referred to as "bosses" when they go out.
With so many bosses, their next generation is naturally seen as the "rich second generation." Even in their innocent childhood, friends could vaguely understand who among their peers had parents with substantial assets. At that time, the Korean drama "The Heirs" starring Lee Min-ho had not yet become a nationwide sensation, but those little "heirs" around us somewhat understood their identity and position in the family business.
Later, I left my hometown to study at Peking University, pursuing my undergraduate and doctoral degrees, foolishly running on the path of a "golden leftover warrior." The lives of childhood friends continued smoothly according to the "rich second generation" script. Until 2013, a stone called "mutual guarantee" began to stir up waves in my hometown.
A, a girl of the same age as me, was my childhood playmate. She was beautiful and came from a wealthy family. Her parents started producing plastic products and sanitary ware in 1995. Although starting a business was difficult, after nearly 20 years of hard work, they managed to run two factories successfully, with profits exceeding ten million during good years. In 2013, we both graduated from college; I struggled through a "fierce" doctoral life, while she began preparing to take over the family business in the office. While many peers were still considering how to scrape together a down payment for a house after graduation, her parents had already bought her a villa in a good location in the city. The family business was thriving, her parents were still in their prime, and she could gradually take over the business and management, leading a well-organized life as an heir.
However, in 2013, the guarantee crisis that began in Wenzhou started to spread throughout Zhejiang Province, affecting my hometown as well. Debts spread rapidly through the mutual guarantee network of small and medium-sized enterprises in the province like a contagious virus. Business closures in Zhejiang turned into a terrifying epidemic, and even originally strong and well-managed enterprises were on the verge of collapse under the sudden "leverage" pressure.
A's parents, due to their good relationships and solid business foundations, were seen as the best guarantee targets by the local bank president. Unable to resist the president's persuasion and the requests of friends and relatives, A's parents successively guaranteed over ten enterprises, with guarantees amounting to nearly 100 million yuan, thus becoming deeply entangled in the guarantee circle. In 2014, A's cousin's business and her uncle's business faced crises one after another, causing domino effects that led A's family business into a massive debt crisis. During that time, A's parents faced a barrage of pressure, threats, and demands from bank presidents and loan officers daily. A father, who originally had a mild smoking habit, began to smoke two packs a day, with his hands trembling occasionally. In 2015, the property under A's name was auctioned by the court to pay off debts, but it was still a drop in the bucket.
Seeing the collapse imminent and unwilling to let years of hard work go to waste, A's parents, like many entrepreneurs, came up with the idea of starting anew: registering a new company and secretly transferring some assets and businesses to the new company, waiting for the old company to naturally cease operations and then resurrecting it. This approach is essentially no different from evading debts; it sounds easy but carries significant risks in practice. Moreover, there are countless connections between the new and old companies, making it impossible to completely shake off credit stains even if the new company gets on track later. Therefore, whose name to use for the new company became crucial.
A's parents ended up on the court's blacklist for failing to fulfill their guarantee responsibilities. In desperation, they wanted to register a new company in A's name, but A was unwilling to bear such significant credit risks at the beginning of her life. After much deliberation, she still refused. Fortunately, her parents understood. Ultimately, A's father enlisted his elderly father to register the company in the old man's name. Although they temporarily escaped the fate of liquidation, as the overall economic situation worsened, the new company's business declined significantly compared to before. After a year of ups and downs, A finally decided to leave the family business and, with her parents' financial support, opened a small Japanese restaurant. The last time we met was in her restaurant, where she and her boyfriend were busy mopping the floor and wiping tables in uniforms, preparing meticulously for the upcoming dining peak, with a "Meituan Takeout" poster hanging in the display window.
The story of the small town speaks of the disappearance of the "heirs." Similar stories unfold daily in Zhejiang.
But even commercial banks are quite "aloof" when facing small and medium-sized enterprises that are small in scale and lacking in strength. Banks that "discriminate against the poor and favor the rich" prefer state-owned large enterprises with high credit ratings, substantial assets, and good operating efficiency, while being quite "stingy" towards small and medium-sized enterprises. Due to their small scale, weak strength, and poor information disclosure capabilities, banks have high requirements for collateral and external guarantees when lending. However, small and medium-sized enterprises are already weak, and many of their assets lack ownership certificates. Additionally, banks often value assets at only 70% or even lower, making them even more constrained. In desperation, external guarantees became the last straw. To protect their own interests, enterprises would also require the external enterprises to guarantee for them, thus forming a mutual guarantee system.
In the gradual development process, the funding guarantee chain of Zhejiang enterprises presents three forms of connections: "line, ring, and network."
The so-called "line" refers to the mutual guarantees between paired enterprises mentioned earlier; "ring" refers to many enterprises jointly forming funding guarantee groups; "network" refers to funding guarantees provided among group enterprises and between subsidiaries within group enterprises, including mutual guarantees between parent and subsidiary companies, among subsidiaries, and among parent companies, creating a very complex relationship.
Small and medium-sized enterprises are generally entangled in the "line, ring, and network" guarantee network. It is very likely that the same enterprise is involved in different levels of guarantees, ultimately leading to layers of leverage being amplified, binding quality enterprises with poor enterprises together, causing a chain reaction.
During economic upturns, the hidden liability risks of the guarantee chain are masked by prosperity, and the credit environment is more lenient for small and medium-sized enterprises. Mutual guarantees and joint guarantees become a win-win cooperation model for multiple parties. Once the economy declines, risks can easily be exposed.
The first to fall in the crisis is Wenzhou, where private finance is most active.
In the second half of 2010, the policy-driven "de-leveraging" began: the central bank raised the reserve requirement ratio 27 times in a row, tightening credit; real estate controls were also ramped up, with purchase restrictions following closely. The first bubble to burst was in real estate, where falling housing and land prices increased the debt burden on enterprises, leading to a vicious cycle: when enterprises could no longer bear the heavy debt burden, selling properties and quickly recouping funds became the first choice; however, once concentrated selling occurred, property and land prices would further decline. Banks also "added insult to injury" at this moment, not only adjusting the "borrow new to pay old" policy to "pay off before lending" but also withdrawing and tightening loans. After enterprises paid off their debts, banks refused to issue new loans, leading to a break in the funding chain and operational difficulties. Even if banks agreed to issue new loans to enterprises, the review process often dragged on, and credit conditions changed repeatedly. To meet temporary funding needs, enterprises had no choice but to turn to high-interest private lending, increasing their operating costs and risks.
Before the collapse of private lending in Wenzhou in 2011, the banks' aggressive withdrawal of loans exacerbated the crisis. Subsequently, the cycle of "real estate value shrinkage—collateral value shrinkage—bank loan withdrawal—debt-laden enterprises becoming insolvent—debt spreading through the guarantee chain—property sale value further shrinking" began to unfold in various third- and fourth-tier cities in Zhejiang.
Under the pressure of the guarantee crisis and the high leverage caused by the guarantee network, the older generation of small and medium-sized enterprise owners in Zhejiang faced enormous pressure, exhausting their lifelong knowledge and skills, each displaying their talents to turn passive de-leveraging into active efforts, honing their "asset relocation" skills, and beginning a protracted "asset defense war"—this is an unglamorous yet unavoidable part of the story, and it is also a footnote to the high bad debt rate and the highest bad debt balance in Zhejiang Province in 2014. The previously mentioned secretive asset transfers and resurrection strategies are merely representative of the thirty-six strategies employed by business owners. In addition to registering companies in the names of parents, children, or even relatives and acting as the actual controllers, business owners sometimes also bring in trustworthy third parties to temporarily take charge, planning to revamp the business once the storm passes. Furthermore, in the asset defense war, there are also tactics like turning the tables and malicious leasing, such as signing long-term lease agreements with nominal "third parties" in advance, making it impossible for assets to be auctioned normally during liquidation, thus effectively retaining the right to use the assets; or fabricating debts to harm the interests of other creditors; or engaging in asset buybacks at low prices during court auctions, significantly reducing debts—because the third auction price can often be as low as 55% of the assessed value. When all else fails, some choose to flee, leading to a bad loan rate and a unique bad loan balance nationwide (not counting the massive amounts of written-off loans). Thus, business owners have provided us with a vivid lesson on "de-leveraging" through their personal experiences and actions.
"De-leveraging" aims to eliminate low-end capacity that is low, small, and scattered, to remove traditional growth drivers, while preserving the "market gene" and "entrepreneurial human capital" of the people of Zhejiang, and strengthening the spirit of entrepreneurship and innovation. Only those who have endured the hardships and trials can truly understand.
The key to "de-leveraging" lies in whether the quality enterprises that still have vitality but are damaged by guarantees have the opportunity to step out of the shadows and start anew; it depends on whether, after "de-leveraging," we can quickly revitalize the closed bad assets, allowing them to play a greater role in quality new enterprises.
All calm is the prelude to the storm#
It also depends on whether, after the storm, the human capital of quality entrepreneurs can effectively combine with quality assets to break through the market barriers. Behind the unglamorous asset transfers is the struggle of Zhejiang's real economy to revive after the excessive credit expansion has plummeted to the bottom. The traditional manufacturing industry, which is shaky, is gradually declining, behind which are the joys and sorrows of countless families.
Countless individuals like A, B, C, and D in the story, who are knowledgeable, capable, and courageous "post-85s" and "post-90s," face the precarious family businesses against the backdrop of "de-leveraging." They choose to shed the halo of heirs, carry their parents' "market genes," don the armor of entrepreneurs, leave their parents' battlegrounds, recruit their own partners across the country, and venture into restaurants and coffee shops in business districts, into narrow office desks in office buildings, into the internet, or onto the e-commerce road guided by Alibaba, embracing capital.
They leave the currently high-profit traditional garment industry and begin to struggle in emerging industries such as internet advertising, social networks, gaming, and e-commerce. On the entrepreneurial journey, these young people who grew up in privilege have encountered various difficulties and challenges: being deceived, being blocked in their offices by debt collection companies, having their technical teams disbanded, and living in a small office space... Fortunately, they have all persevered and are now beginning to enter a virtuous cycle. The following is what Jiayi said:
The industrial upgrade occurs at this moment, subtly happening between the persistence of the older generation and the collective departure of the heirs, within the family across generations... Countless he, she, and they choose to shed the halo of heirs, carry their parents' "market genes," don the armor of entrepreneurs, leave their parents' battlegrounds, and venture into business districts, into narrow office desks, into the internet...