On the other hand, Wenzhou has an excellent reoutation of massive amount of private enterprise. And there are more and more private lending company which has no assurance for legality and safety has established in Wenzhou. And it is difficult for large scale company to lend gigantic amount of money from bank at the same time. So these private lending company is benefit from lending money with a extreme high price. For instance, at first borrower need to pay lending company 0.1% interest rate per day, now it is booming to 2% per day or even higher. Consequently, company can't promise they can earn enough profits to pay the lending money back. That's why there are lots of people bankrupt at this time of period. Also the government has uncontrol on the loanable fund market is also contribute to this effective crisis.

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Capital chain is a cycle of capital flows, the enterprise, is from the financing (capital inflow) to the investment use (such as purchase of materials, expenses incurred, etc.) If the funds have been used, but not before the next demand for investment funds to cash flows or new, then there may be capital chain rupture, which pose a risk to the enterprise.

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In Chinese history, Wenzhou’s management, which most companies in there were minor enterprises, was a role of other places in mainland. Whenzhou’s people were though to be the real example of hard-working and hardship-enduring. However, because of people in Wenzhou became richer and richer, they began to use money in other ways than doing businesses.

Here I must mention some old news about Wenzhou. Earlier in this year, if I do remember the time correctly, Wenzhou’s people got interested in “Chao” (this is a Chinese word of which real meaning is “fry”. In here it means buy something more than needed to increase its price so that the buyers can earn profit by selling it again). They bought houses, virtues, and even a whole building as much as they could for hoping to earn large payback.

But how could they get so much many to purchase such things? The answer is “loans”.

Bosses in Wenzhou’s minor enterprises loaned money to purchase houses and building. As the loanable funds they could get from banks were not enough, they turned to underground usury transaction.

Everything seems fine at the beginning, and then they were hoisted by their own petard. Because their huge purchased in houses and such goods, there came the inflation. Increasing inflation forced government to follow a tight money policy which decreased the loanable funds for minor enterprises from banks. These chain reaction finally forced bosses in Wenzhou’s minor enterprises to borrow more money from the underground usury business. And just as what they did in real estate, this increasing demand made the interest rate higher and higher and higher. Ultimately, they were bankrupted.

In my opinion, banks’ unwillingness to loan money to minor enterprises is the most important reason why such thing happened. This problem (minor enterprises hard to get money from banks) is lasting for a long time and although government tries again and again to improve it, it just could not work. I think the main cause of this situation is that most banks in our country are large banks which prefer loan to large business to small business as minor enterprises.

So except the internal factor cause by Wenzhou’s bosses’ greed, there has more important factor which cause by the disadvantage of Chinese government’s system.

Chinese government does not have enough power to control financial institutions and its economics. Such shortcomings are not only shown in this news but also in others.

As we all know that China is developing in a very fast way, Chinese government is facing more and more challenges. And the highly-control way which our government is used to use begins to be questioned.

Wenzhou’ even is just a beginning, there will be more such evens in the way of China’s developing.

[References: news.baidu.com; NanfangPeople (a Chinese magazine)]

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In Wenzhou, the banks were not willing to lend the fund to the middle or small scale of firms, so these firms could only borrow funds from nongovernmental lenders. These ways of loan were unsafe, once the link of this loan was broken, it will hurt everyone. However, most of the middle or small scale of firms in Wenzhou was stepping in this way. After a tragedy happen just like in Spain, many of these firms’ owner escaped in order to get rid of the large amount of debts they ever borrowed. So nobody is going to repay these debts, which finally cause the lending crisis. There is a question, why Wenzhou get into such a big problem while Spain was only suffering the unemployment.In my opinion, I think this is something link to the Chinese policy. In China, no govermental bank is taking care about the middle and small scale of firms, which didn't happen in the western contry, so it finally cause this different.

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2. There are reasons. First, is the demand of jobs decreases. Many people have skills but there are not enough jobs for them. Besides, the structural unemployment is a significant reason because it's diffcult to solve and it can make a large number of people unemployment.

3. The policy can increase the aggregate demand so many firms have to hire more people to increase the productivity.

4. The supple-side policies can increase people's skill and it can train workers so they will have more chances to be hired.

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Wenzhou, famous for its small elegant products, is a microfilm of China's uprising private financial market and a conglomeration of China's private financial capital. The privatly massive money supply once paced a smooth road for Wenzhou's development and paivate manufacturing companys‘ flourish. Since private creditors provide enormous short term predatory loan with low or even no warrant from debters. The only proof debters (namely small or middle scale companies) could provide is companies' positive protential to earn more money and to pay back debt. Private companies seek predatory loan because legal loans provided by grant banks are decreasing and grant banks favor big-scale state owned companies due to their support of government. Besides, the loanable funds are decreasing mainly because of, first, decline of saving which resulted from more consumption and inflation rate, second, monetary policies enforced by China Central Bank to increase banking reserve.

Since private small and middle scale companies continually face money shortage, which means lack of legal and long term relatively low-interest-rate huge loans.

Now, it's possible to draw a financial chain of Wenzhou's private companies, that on the one hand they borrow legally low-interest-rate loans which are not easy to get, on the other hand, on intermissions between pervious loan already being paid and next loan to be get, they seek short run predatory loans.

It's obvious that once a link on the chain were to collapse, the whole chain would tear down.

Therefore this is how Wenzhou's catastrophe happen:

Government enforces two ways to regulate the market, one of which is a political policy to raise interest rate floor (China do this because she want to shift current economy structure to a more technology oriented with fewer factories and more laboratories), the other one is monetary policy that previous described. As you know majority companies in Wenzhou are production oriented ones, they would definitely face acute financial shortage that they could neither borrow money from banks legally to invest more on capital stock nor pay back short term predatory loans.

Bankruptcies are their fate. However influence reaches far beyond these. Private (or popular) money reserves who run predatory loans and underground banks, or illicit banks would gradually vanish. Further, more plant, money and labor are yielded to more productive and rising industries such as film making, design etc. (Sounds like a creative destruction, isn't it?) But also caused prevalent economic panic.

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According to the breakthrough news, an awful number of Wenzhou bosses committed suicide, or ran away from China to prevent themselves from the trace of the lenders and the police.

It’s noticeable that the interest of the loan is high, so high that the borrowers must pay 6 percent per month as interest. Even one corporation, owned by Hu Fulin, has to pay 20 million as interest per month!

To connect this event to our courses, when the bosses in Wenzhou started to borrow huge number of money from others, the demand curve of loanable funds shifted to the right, so the interest of the funds also increase. As a result, more and more usury appeared underground, and the total chain of the finance became unstable.

In modern market, the financial and credit institutions provide a crucial role in the economic world as a tool for financial flowing. The entrepreneurs can accumulate a significant amount of money to invest in their capital and industries by borrowing money from the financial and credit institutions.

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The simple statement that are relative to this situation is that the interest rate rations the available supply of loanable funds to investment projects that have expected rates of return at or above the interest rate cost of the borrowed fund. Wenzhou is famous for its private enterprise. The economic crisis in Wenzhou is happed given that the Chinese market is not standard and prefect, this is only a few ways for private capital investment, and the rate of return is low while the rich is high. Wenzhou is a city that has a large number of private funds; the sad truth is that they don’t have a reasonable guide to give an idea to them how to use the money. Almost 20 years, they use their private funds in making economy bubble to obtain great income. Therefore, usury is the major choice of private funds. But when the usurious interest is larger that the expected rate, the bursting of the economy bubbles is inevitable. As a result of this, many store-keeper chose to leave the company without paying back the usury.

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I don't want them to have to answer a set of questions, per se, but rather to discuss in a more free-form way the issues raised by what they read from various media sources, as well as the issues raised by each other in their postings here. I hope the postings would begin with a description of what is happening, then move to what various people's motives and decisions have been, what incentives have been created, how other people are responding to those incentives, and (large question) what roles do financial institutions and credit markets play in the functioning of a modern economy. Again, this list is not meant to be a checklist of questions for each student to check off while dutifully answering each one, but rather a general (and vague) guide for what I am looking for on this topic.

Discuss, respond to each other's postings, and dig into the topic to gain understanding.

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Unemployment Rate = (Unemployed Workers / Total Labor Force) * 100

2. Explain the causes of increased unemployment in Spain?

The economic recession in 2008. There is also a big number of workers willing to work but there are no jobs available to meet the demand.

3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?

Expansionary fiscal policy increases aggregate demand by increasing government spending and taxes. The government could provide subsidy for education and firms so that they woudl be able to lower the cost of production and hire more people to work for them reducing unemplloyment.

4. How could supply side policies be used to reduce the level of unemployment in Spain?

Supply side policies increases the potential output of the economy by increasing the quantity and quality of the factors of production.

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the unemployment rate calculate the percentage of the total labour force (TLF):

(Unemployed Population / Total Labour Force) X 100

Explain the causes of increased unemployment in Spain?

huge recession in global made firms not to demand labour force which means there have a structural unemployment. therefore there have workers who willing to work but ther is no enough jobs because of recession in global.

Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?

by expansionary fiscal policy which is incerase government spending. it shifts AS to right whcih increase the AD. therefore there is incerase in Real GDP. by shift AD, it means there increasing consumer speding and it will decrease the employment rate.

How could supply side policies be used to reduce the level of unemployment in Spain?

according the supply side policies, such as educate the citizens to get better skills it can shifts the LRAS to right. there fore it reduce the unemployment rate of Spain

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2. it is caused by the collapse of the Spanish building boom and also due to the global recession in Spain. There are people who want to work but there are shortage in job for everyone to work.

3. by using expansionary fiscal policy could reduce the unemployment rate, there are increase in government spending and this will lead to occur economic growth. thus, the aggregate demand will shift back and decrease in unemployment rate.

4. they can educate the people to improve and to get better skills. they could also do research and technology improvement. from there, they can get to work even though at the lower wage rate.

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(total number of employed labor / total Work Force)

2. Explain the causes of increased unemployment in Spain?

the increased unemployment is caused by two reasons, one is the global recession. the other is the fact that the construction industry's boom collapsed and left most people structurally out of jobs.

3. Explain in a few sentences how expansionary fiscal policy could reduce the rate of unemployment?

the expansionary fiscal policy will be able to reduce the rate of unemployment by increasing the aggregate demand, therefore the businesses will have to hire more- increase the production in relation to the demand.

4. How could supply side policies be used to reduce the level of unemployment in Spain?

as a part of supply side, the re-education program will help by teaching the workers to do other jobs and find new jobs so there will be more AD yay.!!!

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