Thirty years ago, Wenzhou, a city in Zhejiang province located 250 km south of Shanghai, tried to blaze a new path - of developing a largely privatized small and medium enterprises sector. China, then, was still debating whether it should loosen control over its State-run economy or not.

Many Wenzhou residents set up their own workshops making essential consumer goods such as socks and shoes, and started selling them all over China, thus sowing the seeds of entrepreneurship that is now well established within the country.

"Wenzhou (Zhejiang's third largest city in terms of economic output) is surrounded by mountains on three sides. Transportation facilities were inadequate. As the government did not invest in Wenzhou during the 1980s, people had to develop the infrastructure by themselves," said Zhou Dewen, the head of the small- and medium-sized enterprise association of Wenzhou. "They got little external help to start their businesses."

During those days, even as many people in other cities were satisfied with their stable "iron rice bowl" jobs with State-owned firms, Wenzhou salesmen went to faraway corners of the country selling goods made in family workshops.

"I still remember - I was trekking to other cities to sell shoes in the early years of starting our business," recalled Pan Jianzhong, chairman of China Juyi Group, a shoemaker that now employs 4,000 people in Wenzhou and produces 10 million pairs a year for clients ranging from Deichmann of Germany to Zara of Spain.

Today, thanks to its first-mover advantage, this 12,000-sq-km coastal city's gross domestic product has touched 270 billion yuan or about 1 percent of the nation's GDP, the same as Guizhou or Gansu provinces.

Now, however, Wenzhou is facing serious challenges.

Three decades on this city is embarking on a new reform agenda to beat slumping growth.

For its 320,000 private companies, only 16 of which post annual sales of 300 million yuan or higher, the situation is harsh even though official statistics still record that the city's economy is booming.

For example, Wenzhou's exports grew 17.3 percent year-on-year in 2008, although its quarterly growth momentum has been weakening. In fact, its fourth-quarter growth has slid to just 9 percent.

Even as early as March last year, around 20 percent of local enterprises had temporarily stopped or cut production due to reduced demand from overseas.

"Now, there would be more such enterprises trapped in difficulties" as the impact of the crisis becomes more apparent, Zhou said. Last year, for the first time in years, the city's GDP growth rate was the slowest among all cities in Zhejiang, he said.

Wenzhou's old development model, which involved competition based on low prices, small-scale production and labor-intensive industries need to be replaced by a new model that revolves around advanced technology, environmental friendliness and capital- and technology-intensive sectors, he said.

"Wenzhou manufacturers have traditionally adopted a low-price strategy and produced products using basic technology," said Zhou, who is also a consultant for the local government. Moreover, land for future development has also been scarce, he said, adding that the city has started reclaiming land from the sea. "The cost of land use (in this case) would be much higher," he said.

It is crucial that Wenzhou upgrades its industrial structure and develops more environmental-friendly and hi-tech industries. Only this would help in strong and sustained growth, said Zhang Renshou, researcher with the Zhejiang Industrial and Commercial University.

In fact, the municipal government has taken up this challenge. It has undertaken initiatives to step up foreign investment into the city. "Attracting foreign investors, however, is not aimed at cashing in on their capital, but to learn from their technology and management expertise," Zhou said.

Wenzhou has also decided to set up 12 industrial zones in the newly-reclaimed coastal land. Here, capital- and technology-intensive industries, such as shipbuilding and IT, will be the driving force for its development in the coming decades, local officials said.

"The coastal belt will become the new growth engine for Wenzhou's economy," Zhou said.

(China Daily February 17, 2009)