At this used-car market, Wenzhou factory owners who can no longer pay their bills have been selling their nearly new luxury vehicles. Qu Jian, one of the shop owners, said the peak was September, when his lot received scores of luxury cars. (Keith B. Richburg/THE WASHINGTON POST)

For a glimpse of the unfolding debt crisis that many fear could be China’s future, take a trip to the used-car market in this gritty industrial city on the coast.

A half-dozen Mercedes-Benzes, an equal number of BMWs, several Porsches, a Range Rover, a Rolls-Royce and a Hummer, most just a few years old and in pristine condition, were there on a recent day. Their owners were all Wenzhou factory bosses who needed to sell their luxury cars for cash to pay back their business loans.

“It’s because of the credit crisis,” said Ma Jianrui, who runs one of the used-car shops and has seen his business booming. “They need money quickly.”

Many economists fear that the crisis not only could devastate Wenzhou but also may be a portent of what China could be facing on a vastly larger scale: a massive amount of accumulated debt that could rival the subprime crisis in the United States that triggered a larger recession. Most is private debt amassed by small and medium-size companies, economists said, but a portion is personal household debt. Any precise figures are largely guesswork, they said.

Wenzhou’s debt crisis is complex but essentially boils down to this: The small and medium-size factories that drive the local economy found it increasingly hard to get bank loans this year as the government announced it was ending its stimulus spending and tightening the money supply to rein in inflation. The factories turned to the murky private lending market — small, licensed credit companies, unlicensed underwriters, bigger businesses with spare cash to lend, and loan sharks.

Some of the loans were to pay salaries and keep the factories humming. But much of the money went into more speculative ventures, such as investing in real estate or expanding into newer, riskier businesses with the lure of higher returns. And some individuals and businesses that could get scarce bank loans turned around and loaned the money out again, to friends and neighbors, at higher interest rates.

But the continued economic slowdown in the United States and Europe meant orders dried up for Wenzhou’s hundreds of thousands of small factories. Inflation has been increasing — currently about 6 percent in China — which is one reason the government decided to tighten liquidity. Wages have been rising. The Chinese currency, the renminbi, has been gradually gaining in value against the U.S. dollar, further hammering these export-dependent factories.

With the loans coming due, many cannot pay. Some 90 factories have gone out of business here, and in many cases the bosses simply fled town, said Zhou Dewen, chairman of the Wenzhou association representing small and medium-size businesses. The boss of a shoe manufacturing company, deep in debt, committed suicide by jumping off the roof of his factory.

Several of the small credit companies have closed, and the owners have disappeared. Among them are the Jin Qiao Credit Guarantee, which was locked and empty during a recent visit, and the Jin Hong Credit Guarantee, the two firms run by a mother and her daughter. The mother is said to have fled to Finland and the daughter to Brazil.

Warning signs

Some are comparing the problem of Wenzhou to the collapse of Bear Stearns in March 2008, which was a prelude to the larger financial collapse the following September. Guo Tianyong, an economics professor at Beijing’s Central University of Finance and Economics, called Wenzhou “a signal that high-interest private lending might trigger a debt crisis.”

There are already warning signs that the debt problem is spreading, specifically to parts of Jiangsu and Shanxi provinces, and to Inner Mongolia, where many owners of small mines are believed to be overextended.

The privately held debt comes on top of official debt by local government “investment arms” that floated municipal bonds and took out huge bank loans during the stimulus period of 2009 and 2010 to build housing units, airports, highways and subways. Total local government debt in China has been estimated at anywhere between 10 trillion and 14 trillion renminbi (about $1.6 trillion to $2.2 trillion).

Many economists and independent analysts believe that if the central government in Beijing ends up absorbing all of the debt floating around — from private companies and overextended localities, along with the central government’s own debt — China’s real debt-to-GDP ratio could end up being 60 percent or higher.

The bigger concern for the government is unrest. When factories close and bosses flee town, workers cannot collect their salaries. It is a scene that officials do not want repeated across the country.

The situation in Wenzhou is so urgent that during China’s October National Day holiday, Premier Wen Jiabao traveled here with the finance minister and the governor of the central bank. One result of their trip was the establishment of a provincial bailout fund of up to 100 billion renminbi (about $15.7 billion), according to the Chinese media.

“It’s like with General Motors. If the government didn’t save them, GM would have gone bankrupt,” said Wu Jianmin, or “Jimmy,” who runs Lidong Optics, a Wenzhou company making eyeglasses and sunglasses for Wal-Mart, Target, J.C. Penney and others.

The boss of another big eyeglass manufacturer, Center Group, fled to the United States in September, leaving his 1,800 workers unpaid, after taking out too many loans in an effort to branch out into the solar energy business. He returned after the government offered help for restructuring the debt.

‘Crisis of trust’

Wu, head of the association representing Wenzhou’s 800 eyeglass makers, is emblematic of how the lending crisis grew out of control. His company was doing well; orders grew 50 percent this year. He made so much money that he loaned some to friends, a common practice in Chinese business circles. He loaned 6 million renminbi (about $940,000) to one, 2 million (about $315,000) to another.

Wu made both loans in April, for six months, to people from Wenzhou who were involved in the mining business in another province. This month, as the loans have come due, both friends have disappeared.

“Among close friends, we don’t even bother to write up a receipt,” Wu said, shaking his head.

Huang Fajing, whose company, Rifeng, makes high-end metal cigarette lighters, had a similar lament. The downturn in the West was a hard hit for the makers of luxury lighters, he said, so many shifted into the private lending business. He was one of them, and now he can’t get his money back.

“The most serious crisis is the crisis of trust,” Huang said. “No one will want to loan money from now on.”

Researcher Wang Juan contributed to this report from Wenzhou.