Shanghai, the Chinese mainland's best candidate to become an international financial center, is mapping out plans to revitalize the domestic financial market by giving private capital better access via a series of pilot programs.
One such endeavor is the introduction of the financial brokers system to quench the funding thirst of small-cap firms while regulating the market, according to sources affiliated with the municipal government.
The idea of financial brokers derived from the sharp contrast between cash-strapped small-cap firms and an immense network of underground lenders that makes financing accessible, said Fan Yun, chairperson of Shanghai Fushen State Assets Evaluation Co Ltd.
"Since many SMEs fail to reach the threshold for obtaining direct loans from banks, they have already turned to these intermediaries. But as the majority are non-registered agencies, we do want to regulate them into a legal framework," said Fan, a national legislator from Shanghai and economic adviser to the municipal government who led a research team in June to study the credit crunch among SMEs.
A finance broker is a type of commercial broker or middleman who helps clients evaluate their current financing needs and identify the best way to meet them, Fan said.
The job involves investigating a wide range of lending opportunities and then assisting the customer in applying for and ultimately securing the best financing option available.
Hundreds of such financial service intermediaries are running across the city and extending top-notch services to small corporate borrowers, said Dai Jie, head of the international cooperation office of the Shanghai Small Enterprises Center, which is under the auspices of the Shanghai municipal government.
Dai said many of these middlemen used to work as bank creditors so that they know how to pursue options that work well with the operating budget of a client. They are well acquainted with the lending policies and seek to identify and secure the best mortgage deals for clients.
"The finance broker does all the legwork for the client to find and secure the right business arrangement," he noted.
Besides, as commissioned brokers have a vested interest in assisting the client in securing financing, he or she will investigate traditional and non-traditional loan options to find the best solution for a client.
"All we want is to make things transparent and entitle them to a legal identity," Dai said.
The tentative plan will differ from ongoing financial reforms in Wenzhou, a neighboring city famed for private lending but where a local credit crisis has led to direct government intervention.
According to Dai, the Wenzhou model established a government-led lending registration that intends to match the needs of lenders and borrowers. But it may deter borrowers as they have to disclose secretive company information such as revenue and assets.
To dismiss such concerns and given that these middlemen are strongly service-oriented, "it may be more efficient if the government leaves the business to professionals", he added.
This propelled the government research team to come up with the idea of a certified financial broker system. In the tentative plan, Fan suggested a government-run test be organized to determine whether the middleman is eligible to conduct such financial service business.
Once approved, they will register under the local industrial and commercial bureau and work with the guidance of the SME center.
"They can stay as what they used to be and don't need to transform into financial companies.
Rather they help companies get loans and examine and evaluate the risks for banks. It is a win-win situation," Fan said.
Dai noted that many financial service intermediaries surveyed by the research team welcomed such proposals because the legal status would free them from "living in the dark".
Shanghai is home to more than 340,000 SMEs, accounting for a predominant share, or 96.7 percent, of all types of companies in the city. Small firms provide 54.6 percent of the city's job opportunities, according to government figures.
However, financing difficulties remain one of the top issues plaguing these firms. For example, Shanghai Yulong Biotech Ltd found it difficult to obtain loans due to lack of collateral, since its production base is in Shandong province.
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