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Wenzhou: capitalism unbound

From workrooms tucked in alleyways to massive factories, this coastal city's entrepreneurial spirit churns out goods for China and beyond -- and most are privately run, JOHN BARBER finds

Globe and Mail Update

WENZHOU, CHINA — Antonio Liu gazed out the window of the careering minivan and sighed. ''This used to be very beautiful,'' he said. The 30-year-old native remembers a compact collage of rice paddies and vegetable plots, white ducks and ancient farmhouses squeezed onto a narrow shelf of arable land between the green mountains of southern Zhejiang Province and the East China Sea.

Five years later, Yueqing Village is an emerging world centre for the manufacture of high-voltage electrical equipment. There are now almost as many five-storey factories crowding this isolated village as there once were farmhouses. Dense blocks of new apartment buildings and worker dormitories push against the retreating paddies while long trains of heavily laden, smoke-belching trucks groan over the low pass that once separated Yueqing from the coastal city of Wenzhou.

Beautiful, it is not. But like Wenzhou itself, and so many other former villages on this city's outskirts -- the one that now feeds the lion's share of China's appetite for low-voltage electrical equipment, another that manufactures 70 per cent of the world's supply of reusable lighters (distinct from the farther-flung former village that is threatening to dominate world trade in disposable lighters) -- it is amazing. Raw capitalism has never been more vibrant than it is today in this formerly obscure outpost of an ostensibly socialist country.

In Wenzhou, companies that began a decade ago in alleyways and sheds now employ hundreds, even thousands of workers who migrate here from all over China for their small part of the city's famous wealth -- wages of less than $200 a month, meals and a narrow bed in the company dormitory. Every alley abandoned by one successful startup immediately becomes home to more as the city's relentlessly risk-taking entrepreneurs pioneer new modes of small-scale industrial production.

Wenzhou's shoes, eyeglasses, locks, transformers, switches, sex toys, lighters, razors and suits dominate the huge Chinese market, enjoying a 90-per-cent share in some cases, and are making an increasing impact internationally. Wenzhou is said to be the world's largest centre of shoe production; 70 per cent of the world's lighters are made here. The city's wealth, often exported in suitcases full of 100-yuan notes on chartered-bus buying sprees, is blamed for driving up the cost of housing in Shanghai, five hours north on a brand-new expressway. Its abundant supply of new millionaires consumes black German sedans by the container-load.

But new wealth is not news in booming China. What makes this isolated urban region of seven million people remarkable is its entrepreneurialism. Wenzhou Mayor Liu Qi boasts that 99 per cent of the city's companies are privately owned -- something unique in a national economy still dominated by large state-owned enterprises, but a potent source of pride here. Privately owned companies generate 96 per cent of the city's income and employ 85 per cent of its workers, according to the mayor.

And the offshore capital that has driven growth in such famous development zones as the Pearl River Delta near Hong Kong is as conspicuously uncommon here as the state. Helping one another according to their long-established habits, most Wenzhou entrepreneurs raise funds in an informal, handshake-based "old-ladies' bank" that began among friends and relatives and now circulates as much as $4-billion through the local economy. Theirs is the ultimate bootstrap city of the 21st century -- and an emphatic response to criticisms of China's economic development as overly dependent on state direction and foreign capital.

Two new high-rise complexes dominate the main intersection of what used to be Liushi Village on the outskirts of Wenzhou, one of them erected by a local grade-school dropout who now heads a billion-dollar manufacturing enterprise, the other by a former classmate in the village school, now his major competitor. Together, the Chint Group and Delixi Group are China's largest private manufacturers of low- and medium-voltage electrical equipment.

Chint Group founder Nan Cunhui is perhaps the most famous exemplar of what locals proudly call "the Wenzhou spirit." Like many middle-aged Wenzhounese growing up in a region with too many people, scant agricultural land and minimal natural resources, he was too poor to afford an education. As a boy, he helped to support his family by repairing shoes, then entered the village's infant cottage industry of making electric components with a two-room shop. Twenty years later, Chint Group employs 13,000 workers in more than 50 factories and records annual sales of almost $2-billion. Mr. Nan is 41.

Japanese-made robots pouring molten plastic around the clock attest to the modernity of Chint's main factory in Wenzhou; one floor above, the rows upon rows of uniformed workers painstakingly assembling switches out of dozens of tiny pieces affirm its Chinese identity. The factory produces 300,000 units of the one hand-assembled product every day, with each worker responsible for 400 over the course of an eight-hour shift. Almost all of them are migrants who have travelled from central China for the chance of earning $240 a month at Chint -- a premium wage in the brutal labour market that makes the Chinese miracle possible.

As it makes plans to go public, becoming the first of Wenzhou's manufacturers to gain a listing on any stock exchange in China or elsewhere in Asia, Chint's biggest immediate problem is excess growth. The company has been growing 50 per cent a year for the past five years, according to spokesman Liao Yi, and is attempting to slow down in order to consolidate its gains.

Thirty-nine-year-old Wang Zhentao, the brush-cut, jeans-clad shoe king of Wenzhou, China's leading centre of shoe production, tells the same story. Sales at his Aokang Group have increased by two-thirds every year for the past decade, he said in the brand-new corporate headquarters, incongruously styled as a Renaissance palace, that dominates his native village. "If we continue at that rate, we'll be bigger than General Motors in 15 years," he joked. "Obviously, that's impossible."

But Mr. Wang has clearly thought through the numbers, and his own career suggests that nothing in Wenzhou is impossible. Over 16 years, the former carpenter built Aokang from a back-alley startup into one of the country's top 10 shoe companies, employing more than 10,000 workers and producing 10 million pairs of shoes a year for the Chinese market. Now, he's beginning to think big.

"We used to be a Wenzhou company serving the domestic Chinese market, now we are a Chinese company serving the global market," he said. "That's a big market."

In addition to establishing sales agencies on three continents and partnering with an established European brand, Aokang is spearheading construction of a brand-new shoemaking "kingdom," designed to employ 50,000 people, in low-cost Sichuan Province. The company has diversified into commercial real estate and pharmaceuticals and this year it helped to found a nine-member consortium of local industrial companies, Sinorich Holdings, that is launching the country's first privately owned bank.

But true to their pioneering ways, the Wenzhounese are already China's savviest bankers, having operated a large and illegal curb market for decades under the noses of dis-approving authorities. It is the source of most of the capital fuelling the growth of the region's emerging corporate giants, according to Huang Fajing, owner of Wenzhou's Rifeng Lighter Co.

"In China, it's very difficult for private companies to borrow money from the banks," he explained. "It's a fact that state-owned companies get special treatment. So for us, it's better to go the informal route -- not to borrow from banks, but from friends and among folk circles."

Mr. Huang estimated that handshake deals in the local curb market have put as much as $24-billion to work in local industries. Others guess that the amount is even higher. And for its part, the central government recently decided not only to tolerate the market but to publicize its prevailing interest rates.

The level of trust that makes such mutual aid possible is a point of pride among Wenzhou entrepreneurs. Every industry concentrates dozens of large and small suppliers in dense networks of competition and co-operation that the Wenzhounese call the "little-dog economy." Each pack of little dogs is highly specialized: One cluster will produce leather shoes, another synthetic; high-voltage electrical equipment comes from Yueqing, while Liushi specializes in low- and medium-voltage equipment.

Strollers are rare on most commercial streets of Wenzhou, where soaring towers and vast new public buildings butt against a buzzing hive of industrial activity. Portable generators -- necessary to keep the little dogs fed in an era of frequent power shortages -- are the most popular consumer item here. Pumps, valves, compressors, drill presses and other machine tools crowd the three-metre storefronts lining suburban roads. Red banners denote side streets devoted to trade in different types of industrial components while billboards tout best buys in bulk polyurethane.

Metal shavings and water run into the gutter along one typical row of vest-pocket machine shops. A young worker in one shop machines the metal dies that will be used to make plastic shoe soles, while his colleague piles the finished products onto the footrests of a scooter for delivery to a nearby factory.

Deep inside the gloom next door, underneath a sagging plywood loft, two men in undershirts with cigarettes hanging from their lips use a battered-looking computer to operate the milling machine that blocks the entrance to their shop. Next door again, their neighbour cuts steel plate in a shower of sparks. The air is thick with the exhaust of chuffing compressors in every shop.

Such is the milieu that produced even the most polished of the new tycoons who have come to dominate the local economy. Zhou Dahu, his wife and son slept on the floor of the first tiny shop they rented when they started Tiger Brand Lighters in 1991, using a settlement of a few hundred dollars his wife received when she lost her job in a failing state-owned enterprise. For convenience's sake, they maintained the same arrangement when they moved to a slightly larger shop a few years later, carving out a two-level, cubicle-sized living space among the machinery and the workers.

"We had no kitchen so we had to buy food and eat in the laneway," recalled Mr. Zhou, a former postal worker. "We didn't have a toilet either, so for five years we used the public toilet."

Less than a decade later, Tiger Brand occupies a brand-new five-storey factory with a swank showroom and offices in glass, granite and steel. The Zhou family employs several hundred workers who hand-assemble a bewildering variety of refillable lighters, totalling 20 million a year.

Mr. Zhou's tailored red T-shirt sets him apart from the norm among Wenzhou tycoons, most of whom go to work in no-name polo shirts, baggy trousers and rubber-soled shoes. Rifeng Lighter's Huang Fajing was declared businessman of the year by Chinese state television last year, due to his role in defeating European trade restrictions on behalf of the Wenzhou Cigarette Instrument Industry Association, but he flies at the back of the plane, economy class, when he travels on business to Beijing. Chen Xiao Xiang of SharMoon Garments, who won fame when he hired actor Pierce Brosnan to endorse his suits in China, still lives where he began, the house now overshadowed by a new factory and dormitories for hundreds of migrant workers.

Some Chinese commentators, noting that Wenzhou is China's most Christianized city, have detected the famous "Protestant ethic" at work in the city's restless striving -- a cultural factor that German sociologist Max Weber described as the essential prerequisite for modern capitalism. But locals are more apt to identify desperate poverty as the source of the Wenzhou spirit. Cut off from the rest of the country by mountains and sea -- until the 1990s, there was neither a railway nor a highway leading to Wenzhou, and travelling to Shanghai took 24 hours aboard ship -- Wenzhou struggled to feed itself long after the Communist revolution of 1949. The China-wide and international diaspora that now supports Wenzhou's trade originated in desperate journeys in search of work.

"Because it was so isolated, Wenzhou was never able to enjoy the privileges of the planned economy," Mr. Huang said. "We were pushed forward by fate; trade was our only option. We had to fight."

Some pioneering Wenzhou capitalists were executed for engaging in private business during the Cultural Revolution, according to Ma Jinlong, the city's leading economist. "But it still went on, even though the authorities forbade it again and again." He added that the city was already simmering when the government of Deng Xiaoping began cautiously to liberalize the Chinese economy. "When they allowed this," said Mr. Ma, who supervised the reforms in Wenzhou and counts libertarian economist Friedrich Hayek among his heroes, "Wenzhou exploded."

There's nothing unique about Wenzhou that explains its continuing success, according to the economist. Its advantage was hitting the ground running. And it will have to run even harder to keep ahead of other Chinese regions that are just beginning to enjoy the fruits of private capitalism. "It's not reasonable to expect Wenzhou always to stay out front," he said.

True to their adaptive habits, most Wenzhou entrepreneurs are already working new angles -- building distant plants to exploit even cheaper labour, diversifying into new lines, making international alliances in order to claw their way up the technological ladder, spending to establish their products as recognizable brands.

Beginning in penury and hiding for years in legal shadows, China's first generation of proprietor-industrialists has already changed the course of the Middle Kingdom: Even the most resistant statists now acknowledge that the so-called Wenzhou model of economic development -- a Chinese euphemism for unfettered capitalism -- is a triumph. Now they are about to change the world.

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