"Shoe guy" suffers China "cocaine" credit withdrawal

WENZHOU, China -- The International Monetary Fund cut its economic growth forecast for China this year to about 7 percent, which is lower than China's own 7.5 percent target.

To fuel growth, the IMF has encouraged China to avoid stimulus spending and decrease financial risks.

Manufacturing has always been one of the key drivers of growth in China, and CBS News correspondent Seth Doane met American "shoe guy" Bob Gwynne, who's been trying to adjust to China's shifting marketplace.

Working in China for more than 17 years, Gwynne has created hundreds of designs for export to the U.S. market.

At a sweltering factory in Wenzhou, China's shoe capital, where some of the shoes from his company "Barricci" are produced, Gwynne told Doane that everything has changed for his business in the last several years.

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First, orders fell at least 30-percent because of the economic slowdown in the U.S., then inflation caused workers wages in China to shoot up, and then credit dried up.

Gwynne said he simply making less money than he used to. "It's harder," he said, "the growth is over."

Years of low interest rates -- set by the central government -- had encouraged easy lending. In China, big state-backed companies have an easier time getting loans. So some factories began acting like banks, making money available to other, private businesses.

"They were actually in the shadow loan business making more money than the actual shoes," said Gwynne of the factory he and Seth stood in, sweating profusely. "The shoes were a vehicle to get the credit line from the bank."

It was so easy to borrow money that factories would finance production. Clients, including Gwynne, could pay for the shoes much later. But no more.

Michael Pettis, a former Wall Street trader who now lives in Beijing, likened the reliance on cheap credit to drug addiction.

"People call cheap money a kind of cocaine; it creates the illusion of health and vibrancy... but you can only do it up to some point, and then you're going to have a heart attack. That's the problem with cheap money," Pettis told Doane.

A year ago, China's government tried to reign-in easy lending to stop risky investments. But that only created a market panic which temporarily froze all lending.

"China is being forced to adjust -- at the worst possible time -- when the rest of the world is in no shape to help it through the adjustment," explained Pettis.

Now the government is trying to make it easier for banks to lend again, as a way to fuel growth.

"Shoe guy" Gwynne is making his own adjustments. He's only making shoes for customers he knows can pay, or even help finance the order.

"The growth in China hid a lot of problems," he said. "You know, the inefficiency was so great, where today, it's forcing people to really scrutinize their business and manage properly."

When China tried to reform, it revealed just how fragile its economy really is.

Today, the government is still hoping to hit its target growth rate of 7.5 percent, and stabilize what is now the world's largest economy.