Wenzhou set to undertake private financing reforms

(Ecns.cn)--Known as China's private financing hub, the city of Wenzhou located in east China's Zhejiang Province has for years fueled local enterprises and provided individuals with cash and credit based on trust and the promise of fat profits.

Yet the city has been suffering from serious economic woes, causing debtors to flee (or to commit suicide) and the private loan network to collapse, all of which has prompted the local government to press for further financial reforms.

Ding Xingcan, vice head of Kangnai Group Ltd., tells China Radio International (CRI) that "too many small and medium-sized enterprises (SMEs) are in need of funds, but the banks are not able to meet their needs. There is in fact a large amount of idle capital in Wenzhou, but no proper financing channels."

Statistics show that Wenzhou is home to some 4,000 SMEs, but many are barely able to stay afloat due to a capital shortage amid tighter public lending policies, so they must often seek help from the private capital market. The local government estimates that 600 billion yuan worth of funds are available, yet a large number of SMEs are still finding themselves in trouble.

Wang Chen, a financial expert, explains that the disorderly operation of the private capital market has led to today's situation.

"Underground banks now run massive private capital operations in the city. They illegally absorb deposits and lend money to SMEs at unreasonably high rates. The highest annual yield of such banks reached 170 percent last year, and the sky-high interest rates obstruct the development of debtor enterprises," says Wang

Premier Wen Jiabao noted at the press conference on the last day of the "two sessions" that "government should allow private capital to enter the financial sector and make the process standardized and open. China's financial authorities are actively considering using Wenzhou as one of the pilot cities for overall reform in private financing."

But while Wen's statement lifted the hearts of many, some economists are concerned about the implementation of the policies, points out CRI.

Charles Liu, founder of Hao Capital: "It's not just a question of shouting out slogans. To save SMEs, you have to allow private lending to take place. The government should come up with an overall framework of how it's going to be done. Yet the details will take some time to work out, as well as the actual implementation. I think it will take years to set up a properly regulated market."

In response, the Wenzhou government has drafted a financial reform plan and submitted it to higher authorities for approval.

"Related departments have already countersigned the plan," Shang Fulin, chairman of the China Securities Regulatory Commission, revealed during the "two sessions."

The plan, once approved, will be the first official move to open the country's financial market to large-sum private capital, says China Newsweek, adding that it is still unclear how far this reform could go.

Although the Financial Service Office, which is subordinate to the Wenzhou government, refused to disclose detailed information of the plan, experts believe it would be similar to the new strategies for the city's financial reforms. Dubbed "1+8," the plan aims to set up a legal, multi-level financial service system engaged in by local banks, rural cooperative financial institutions and small loan companies.

According to the "1+8" initiative, about 120 small loan companies would be established within three years, with total registered capital of about 800 million yuan.

The local government is also trying to introduce interest rate marketization into the city's private loan businesses, gradually create a multi-layered interest rate mechanism led by the central bank's benchmark, and bridge the gap between private and regulated non-private financial institutions.

In February, Wenzhou established its first private capital management company, named Xintong, which is comprised of five local enterprises and four individuals and has registered capital of 100 million yuan.

Huang Yongping, manager of Xintong, told CRI that "We established this company with a clear mission: to guide the reform of private capital management. We help connect local enterprises facing financial difficulties with massive amounts of idle funds."

Huang added that the company does not provide private loans; instead it focuses on equity investment and corporate restructure investment with fixed returns.

According to Wang Chen, the company is a good example of a well-regulated private capital management company.

"Clarification of a company's legal source of capital is the first step in regulating the private capital market," says Wang. "The existence of such proof prevents illegal absorption of deposits and money laundering commonly seen in underground banks. Usury can be prevented as long as these companies keep their rates of return under the national legal cap, and equity investors who are well informed by a registered company should be more aware of the risks than those putting money into underground debt investments."

Local financial service officials also point out that the establishment of this company is a crucial step in the reform of the local financial system, as well as an essential leap forward in regulating the local private capital market.

China Newsweek further reveals that a private loan registration center has already been established, and will begin full operation at the end of this month.

The new financing platforms for private loans are, in essence, different from traditional loan companies and state-owned banks, since they are not allowed to absorb deposits and will keep information of both creditors and debtors fairly open to the public.

"Yet it still depends on the country's policies as to whether these platforms can be transformed into private banks in the future," Yan Yipan, director of the Zhejiang Deepsoul Law Firm, told China Newsweek.