Social Capital in Wenzhou Banking Networks: Filling Structural Holes in China's Hottest Financial Market

In 2011, responding to a credit crunch, the municipality-run Wenzhou Financial Investment Group [WZ-FIG] was established.  Wenzhou had been the fastest growing municipal economy in China’s fastest-growing province for two decades. But the global financial crisis hit hard the local small-and-medium enterprises [SMEs] and smaller banks which made up Wenzhou’s financial sector.  As capital dried up and smaller local banks refused to lend, Wenzhou officials decided a government-run financial intermediary was needed to revive the economy and help local banks, financiers and their clients. 

The so-called “Wenzhou model” has long been dependent on financial capital from other parts of China to fund local entrepreneurs, and the financial network through which this financial capital flowed has consisted largely of smaller banks and informal financing intermediaries, including so-called friends & family lending.  This more informal financial network relies heavily on interpersonal connections, reputation, and trust, the major ingredients of social capital in banking and finance.  WZ-FIG was backed by the national government and, this paper argues, created to generate the social capital lost in the credit crunch.  It has not been successful in its attempt to become a financial intermediary in this environment.  However, Wenzhou Dai, a peer-to-peer on-line financing company established with little capital and a small staff in the same year as WZ-FIG, has been highly successful.  In fact, Wenzhou Dai has quickly grown to be one of China’s top internet financing companies.  In effect, Wenzhou Dai has exported the “Wenzhou model” by creating a Wenzhou- and Shanghai-based funding platform using the Wenzhou brand name to create a new form of financing network.

Although Wenzhou has long been the center of SME finance in China, all but two extant research papers are in Chinese and so not well-known.  But enough data exists in these papers, in provincial and municipal sources, through the author[s]’ contacts and through interviews to craft a metaanalysis and case study testing four linked hypotheses [stated here in question form]:  1, does social capital contract in an economic cycle downturn [please note that this is a novel idea in the literature of credit channels banking economics]?  2, was WZ-FIG successful in creating social capital? 3, was Wenzhou Dai successful in creating social capital?  4, does Wenzhou Dai’s apparent success support a structural holes model in financial networks?  This paper integrates institutional and financial economics with social capital and social network theory to examine these outcomes, probe Chinese banking practices, and provide results which may be extended into studies of banking theory, the nature of Chinese social capital in business, and sociology of finance.  The author[s] have been fully funded, have visited bankers, regulators and investors in Wenzhou, Hangzhou and Beijing for preliminary research in 2013 and 2014, have partially written this paper and presented aspects of it, and will return this April for final stage interviews and paper completion.