Instead of apologizing for the rough ride from the airport to the hotel, the taxi driver said his town may not have the best roads, bridges and tunnels in the country, but "we built them all with our own money".

In fact, Wenzhou has built quite a bit more than that. As the hotbed of entrepreneurship on the mainland, Wenzhou's private sector has created an almost self-contained economic ecosystem that has brought great wealth to the city.

An astute visitor can get a glimpse of the town's prosperity through the many dealerships for luxury cars, such as Rolls-Royce, Bentley, Mercedes and, of course, Ferrari and Porsche, and the boutiques of high-fashion brands from France, Italy and Spain.

But even this citadel of enterprising merchants and their hardy workers could not hold off the onslaught of the global economic recession, which greatly depressed the demand for the wide range of consumer goods that were churned out by the billions in the many thousands of big and small Wenzhou factories. The slow drying up of export income tipped the balance of the city's ecosystem and touched off a localized, but severe, financial crisis.

Although many Wenzhou entrepreneurs could feel the hurt, they have remained confident that, given time, the system they created can regain its equilibrium. But the painful adjustment process, involving hundreds of failed businesses, billions of yuan in soured debt and many thousands of unpaid workers, has brought into question the validity and sustainability of the Wenzhou economic model.

Such doubts apparently brought the authorities around to the view that there was a pressing need for reform aimed at establishing an orderly and a properly supervised money market to replace the estimated 300 billion yuan ($48.13 billion) underground banking system, where a handshake is as good as a loan document and personal relations take precedence over due diligence. But the financial reform that was kicked off with great fanfare in March 2012 has made little traction.

This is understandable. The benefits of financial reform don't usually show up during the initial stage, which can last for a few years. During that time, the process of reform is seen by those affected to have brought only trouble and inconvenience. That should explain why so many Wenzhou merchants and moneylenders are giving financial reform a cold shoulder.

For instance, only three of the hundred or so moneylenders in Wenzhou have answered the government call to turn themselves into registered finance companies or rural banks. The resistance of the others could frustrate the plan to establish a transparent interbank money market that can facilitate the channeling of bank deposits to finance business activities at interest rates more in sync with real supply and demand.

It's clear that official pleas for voluntary cooperation have fallen on deaf ears. Wenzhou's hard-nosed business people are not going to abandon their old practices to embrace financial reform unless they can see real and immediate benefits in doing so.

In this respect, they are not behaving in any particularly selfish or greedy way. When the government of Hong Kong embarked on its version of financial reform in the late 1970s, so as to lay the groundwork for the building of an international financial center, it had to bring the private sector on board not only by persuasion and some arm-twisting, but, more effectively, with a series of legislature initiatives.

The new laws redefined the financial industry by banning some old practices and introducing a fresh classification of market players placed under the supervision of a newly established watchdog, independent of the bureaucracy. Those companies that were either unwilling or not qualified to gain admittance to the new order were left with no choice but to shut down.

Since persuasion seems to have failed in Wenzhou, the government may have to consider legislative initiatives to restart the financial reform engine.

(China Daily 02/18/2013 page8)