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Economy

Small Goods, Bigger Plans

Small commodity manufacturers in Yiwu are pushing back as government-led upgrades to the city’s industrial mix are removing the base on which the city made its global reputation

By NewsChina Updated Feb.1

Merchants in Yiwu, Zhejiang Province, a city known across the globe for its small commodity manufacturing and wholesales, seemed convinced that incumbent US President Donald Trump was going to win reelection, judging by the way Trump merchandise like flags, hats and T-shirts was flying off the shelves. According to media reports, orders for Trump-branded merch outnumbered those for his opponent, former US vice president and now President-elect Joe Biden, as much as five to one. 

In 2016, business owners in Yiwu were confident in their prediction of a Trump victory, after orders for Hillary Clinton merchandise declined ahead of the election.  

Although the signs were the same, this time, for Biden at least, the vaunted “Yiwu index” was not so accurate.  

But changes in Yiwu’s regulations on land use and taxes may see future election candidates looking elsewhere for their campaign swag. The city government is intent on rezoning industrial land for upgrading, and many enterprises have been served with eviction notices. It has come as a shock to Yiwu’s business community, with many wondering if they can afford to start again, even if they receive compensation.  

One of the areas targeted for redevelopment is Heyetang Industrial Zone, just four kilometers from Yiwu Small Commodity Market, now part of Yiwu International Trade City. Firms based at Heyetang must leave by March 2021, with media reporting that Yiwu government will complete the land repurchasing process by the end of 2020.  

Heyetang is not the only area targeted for redevelopment. Businessman Duan Li, whose company is in the industrial zone of Chi’an Town, 30 kilometers from Yiwu Market, told NewsChina that they have also been served with a demolition order. “I didn’t expect that. I thought [the government] would only want the prime land in or near downtown,” he said.  

As he owns the land use rights, Duan will receive compensation. But the owners of firms in rented facilities face bigger difficulties as they will not be compensated enough to buy or rent new ones in Yiwu. To compound matters, due to the demolition program, land prices in neighboring towns and counties have shot up.
Short Notice 
“We were notified about the demolition quite suddenly. Officials came to ask us for our opinions a month after the local media reported the news,” Tian Feng, a manufacturer at Heyetang, told NewsChina.  

“We didn’t take it seriously at first until we found out that some other industrial zones were already being knocked down,” Tian said. “So we went to see the people in the office in charge of our street, but they said they weren’t clear either, and the city government had notified them suddenly too. We tried the city officials, but they told us to go back to our local office.”  

As one of Yiwu’s biggest industrial zones, Heyetang occupies 1,166 mu (0.78 square kilometers) of land. It includes 836 enterprises, only 152 of which have the right of land use. The rest are tenants. In 2019, some 18,000 people worked in the zone, equal to 1.5 percent of Yiwu’s permanent resident population, according to China’s sixth population census. That same year, the combined output of the zone’s enterprises with an annual business revenue of 20 million yuan (US$2.9m) or above reached 981 million yuan (US$144.3m). 

Tian’s business started as a rural family workshop. He rented a space in Heyetang when they expanded, but was only able to buy land use rights for 30 years several years ago.  

According to an article by Zhou Songqiang, the director of the City Condition Research Center under the Party School of the Yiwu Municipal Committee of the Communist Party of China, Yiwu is home to more than 8,000 enterprises which produce at least 800,000 kinds of novelties and accessories, such as brooches, necklaces and hair accessories. Around 3,000 producers have annual output exceeding 20 billion yuan (US$2.9b).  

“I’ve been in this industry for almost 20 years, and the market demand [for trinkets and accessories] is still increasing, especially during the pandemic when many people stuck at home turned to crafting activities to kill time,” Tian said. 
 
Tian was about to increase capacity when he got the demolition notice.  

“They asked us to leave by January 2021, but I told them we need at least two years. We have to buy a new factory, but how can we raise the money we need so quickly? We were hit with big losses due to the pandemic, so right now we’re just focusing on surviving,” another businessman in Heyetang who did not reveal his name told NewsChina.  

Zhang Liming, deputy director of the Yiwu Municipal Natural Resources and Planning Bureau, told NewsChina that the local government is still looking into the feasibility of expropriating the Heyetang Industrial Zone and has not yet published detailed policies on how to proceed. “The process will be in line with the law,” he said.  

There are only two legal ways to expropriate land in China: either when the land is to be used for development in the public interest or by purchasing the land after negotiating with the enterprises involved.  

Whichever way they try, moving so many firms in such a short time will prove tough. “I don’t think the government can do it if they follow the letter of the law... [government employees] often just go ahead before the actual policies are issued,” one official who is working on land expropriation in Yiwu told NewsChina on condition of anonymity.  

Local media reported on the case of a township government overseen by Yiwu which demolished an industrial zone in three months after government employees allegedly made frequent visits to the zone’s firms, eventually persuading them to quit one month before the official demolition notice was issued.  

Duan Li is dismayed by these tactics. “Do [government employees] have the right to drive enterprises out without any official documents?” he said. 

“The enterprises’ land use rights are legally protected, so investors could lose confidence in Yiwu if the government expropriates land just by issuing documents that disregard whether the businesses are willing to leave,” Li Bin, a researcher focusing on the industrial development of Yiwu, told NewsChina. “Investors will worry that Yiwu would not protect their rights and interests,” he added. 

Trucks and excavators clear away rubble from the demolished Xiazhuzhai Village, an industrial zone in Yiwu, October 27, 2020

One Mu Fits All
According to Feng Shumin, a chief engineer at the Yiwu Municipal Bureau of Economy and Information Technology, Yiwu has adopted a provincial standard referred to as “per mu gains.” This is a process used to tally the total productivity of all enterprises located within one mu - equivalent to 666 square meters - to judge whether an enterprise is eligible to stay in an industrial zone.  

“Some enterprises bought land 20 years ago but only live on the income they get from renting it to other businesses, yet many new enterprises can’t get land. We now want to give the land to companies that are doing practical business,” he told NewsChina. “Since Zhejiang Province is mountainous with limited land resources, we have to bring existing lands back into active use,” he added.  

The “per mu gains” standard started in Yiwu in 2014 when authorities rated enterprises from A-D, with those rated A entitled to preferential policies and those rated D encouraged to close or merge.  

Based on the standard, Yiwu government in 2019 launched a program aimed at repurposing more than 20,000 mu (1.3 square kilometers) of land it considered was not being utilized at optimal capacity between 2020 and 2022. That covers half the industrial land in Yiwu.  

“It’s like students having to take exams. We can use [the standard] to clarify which land is lying idle or not being fully used,” Ding Hanjun, director of the Yiwu Municipal Bureau of Economy and Information Technology, told NewsChina.  

According to Yiwu government, the appraisal for industrial enterprises with an annual revenue of 20 million yuan (US$2.9m) or above involves seven metrics, including per mu tax revenue, per mu sales volume and per mu industrial value added, with tax revenue weighted more heavily.  

Interviewees claimed the appraisal method is not friendly to small- and medium-sized enterprises (SMEs), since there are often several firms on one mu of land with varying levels of productivity. Mei Jun, who has a factory in Xiazhuzhai Industrial Zone, told NewsChina that they paid 1 million yuan (US$147,058) in taxes in 2019, higher than the government’s minimum 300,000 yuan (US$44,118), but that figure was averaged down by smaller enterprises on the same plot of land, meaning that Mei’s company did not qualify for extra support.  

As Xiazhuzhai Industrial Zone has been demolished, Mei said he had already spent more than 10 million yuan (US$1.5m) buying a new plant in Jinhua, another city in Zhejiang. “We incurred big losses from the demolition, because we stopped production during the move, but I still had to pay wages and rent,” he said.
Cash-strapped City
Huang Chun, an associate professor at Zhejiang University of Finance and Economy, said that Zhejiang’s provincial document on the “per mu gains” appraisal aims to promote industrial upgrading, and should not be used as the basis for demolition, as Yiwu has interpreted it.  

Yiwu’s demolition plan, according to analysts, is partly due to the tight finances of the local government. A report on the 2019 budget appropriations and draft budget for 2020, published on the Yiwu Municipal Bureau of Finance website, reads that “the government’s growth in revenue cannot really cover the increase in expenditure.”  

“Government enterprises have struggled with marketization and weak self-sufficiency with their debt rate approaching 75 percent. If revenue from land sales continues to slide, the government in turn will have less to support industry, and this will severely impact the stability and security of the government’s capital chain,” read the report.  

Yiwu government sources its revenue from taxation and government funds, with the latter mainly derived from land sales.  

Official data shows that Yiwu’s revenue from land sales and transfers soared from 2.3 billion (US$300m) in 2015 to 30 billion yuan (US$4.4b) in 2019.  

As the availability of new land to develop for industrial use is limited, local authorities, according to Zhang Liming, have no option but to turn to land that has already been developed.  

“Supposing the [local] government spends 50 million yuan (US$7.4m) buying a parcel of land back, they can resell it for 200-300 million yuan (US$29.4-44.1m), and increase its value by developing real estate on it,” one entrepreneur in Yiwu who refused to reveal his name told NewsChina.  

Local media reported that a large part of the repurposed land in Yiwu was rezoned for commercial real estate. As enterprises in industrial zones are forced to leave, a government-backed real estate platform has been advertising to those enterprise owners, encouraging them to rent the high-rise offices the government built in 2014. 

Workers make leggings at a plant in Yiwu

SME Consideration
Researcher Li Bin believes that Yiwu, as the world’s biggest small commodity manufacturer, should take SMEs into more consideration across the board. But Ding said that Yiwu also must keep in step with Zhejiang Province, which is a high-tech and export hub.  

According to Ding, Zhejiang Province plans to eliminate all enterprises that fail to pay a minimum “per mu taxation” of 50,000 yuan (US$7,605) annually. Although still lower than the province’s, Yiwu gradually raised its minimum tax level in recent years, reaching 30,000 yuan (US$4,412) this year. But Ding emphasized that the tax appraisal is not definitely related to demolition.  

“The province stressed the need to either eliminate or upgrade the failed enterprises, but that does not mean demolishing them. Our bureau can’t decide on that alone,” he said.  

Li Bin opposed using the increased tax level as a criterion to shut down an enterprise. “It’s impossible for an enterprise to keep increasing performance, since the market is not always up. Furthermore, a progressively increasing standard is not practical for small commodities [whose absolute value is low],” he said.  

Another government official in Yiwu who asked for anonymity agreed. “It’s unfair to judge Yiwu purely by GDP... The small commodity industry has brought wealth to the people,” he said.  

Zhang Jinyin, a regional manager working with Alibaba’s Yiwu Branch told NewsChina in a previous interview that Yiwu has logistical advantages - the city allows producers to complete delivery, customs clearance and inspection all within a five-kilometer radius of Yiwu Market.  

These advantages promote industrial clusters. Zhao Wei, an economics professor at Zhejiang University, has publicly praised the “Yiwu model” many times. Because of the low transportation costs, Yiwu has replaced Guangzhou, South China’s Guangdong Province, as the main supplier of socks for export and the domestic market. For the same reason, the small commodity industry in Yiwu has two-thirds of the country’s total market share and two-fifths of the world’s. 

But the advantage is narrowing, according to Zhou Songqing. He wrote in his article that the total output of Yiwu’s small commodity enterprises with an annual revenue of 20 million yuan (US$3.03m) or above slowly decreased between 2014 and 2016, but it has plunged since 2017. 

“The total sales volume of small commodity enterprises dropped by 45.09 percent in 2017, compared to that in 2016, and the figure further dropped by 53.68 percent in 2018,” he wrote. 

Ding agreed. “The output of small commodity enterprises [in Yiwu] has hit a ceiling. That’s why we are trying to attract big industrial enterprises,” he said. “The SMEs will leave sooner or later when their operation costs go up too much,” he added.  

“Taxation is not the only index and the government will take other elements into consideration, such as technology. We will definitely support a high-tech enterprise, especially in the chip industry, even though it pays nothing to the government,” said Zhang Liming.  

But industrial upgrading and transition will take time, and Yiwu is apparently in a hurry. The municipal finance bureau’s report said that “the new industries have not yet effectively increased capacity [to the fullest extent], and there is no new growth point to help increase the government’s taxation.”  

“Yiwu should follow a two-pronged strategy: let in high-tech enterprises while continuing to support small commodity manufacturing which supported the development of Yiwu’s commodity market,” Zhou Huaishan, director of Yiwu Business Think Tank, told NewsChina.  

Many interviewees warned that forcing out SMEs will be like cutting off Yiwu’s roots. “Those enterprises are actually highly competitive worldwide. How could Yiwu have developed its commodity market without them?” asked one of the anonymous interviewees.
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