Wenzhou has long been known for its booming private enterprise. Since China’s economic opening and reforms in the 1970s, Wenzhou has been treated as a test case for a capitalist model relying heavily on small- and medium-sized enterprises focused on low-end manufacturing for export. This approach was so successful that it became known as the “Wenzhou model” and was adopted throughout the country. The success of this model is largely based on manufacturers squeezing their profit margins by reducing labor costs and lowering the quality of their products. This model works when the global economy is performing reasonably well, demand is high and the cost for components and small parts is rising. However, in a period of low demand — such as the current one — the model is largely unsustainable. Over the past decade, businesses in Wenzhou have increasingly turned away from the model, instead focusing on more speculative activity such as real estate investment. Like the Wenzhou model before it, this approach has also been emulated throughout the rest of China. However, such speculative activity is not without risks, and the city has recently seen a rash of bankruptcies and partial business shutdowns. Developments in Wenzhou are indicative of the country’s unsustainable economic model, and it comes at an already challenging time for the central government.
