Wenzhou to legalize private loans

A regulation on private lending in Wenzhou, an entrepreneurial hub in East China's Zhejiang Province, will be implemented starting March 1, a move to legalize underground lending.

Local authorities are soliciting public opinion on the regulation and its detailed rules until Friday.

The regulation requires borrowers to file with local financial authorities if a single loan exceeds 3 million yuan ($494,400), multiple loans accumulate to 10 million yuan, or when more than 30 people are involved as lenders.

"If there are private borrowers that still don't meet those standards, we encourage them to file with financial authorities and we will offer them policy support," an official surnamed Hu at the city government's financial works office told the Global Times.

He did not specify what that support might entail.

The local regulation is the first of its kind across the country, aimed at turning underground lending into acceptable credit and benefit small and medium-sized firms that find it difficult to obtain loans from banks, experts said.

"There are debates on the mandatory registration of private lending, and opponents have concerns that the registration won't help enhance the safety of lending but will expose their privacy," Zhou Dewen, president of the Wenzhou Council for the Promotion of Small and Medium-sized Enterprises (SMEs), told the Global Times Monday.

Civil servants from local financial management departments are also forbidden to participate in private financing activities, the regulation said. This could help prevent abuses of power by rent-seeking, said Zhou.

Previously, Zhou told news portal sina.com that civil servants have quite a lot of resources due to their positions. If they are allowed to enter the private lending market, they would be able to translate those resources into profits, which is unfair.

The regulation also stipulates that the private lending rate will be set based on negotiations between the borrower and the lender, as long as it doesn't violate national regulations. Currently, the private lending rate is capped at four times the benchmark official lending rate in China.

Wenzhou Private Finance Index, which tracks local private financing interest rates, stayed at 19.91 percent in December 2013, down 1.12 percentage points from the beginning of last year, because of growing competition among private lenders and banks increasing support to micro- and small-sized firms, said a statement released by the city government's financial works office on Monday.

The regulation reflects efforts by local authorities to increase the transparency of private lending in the wake of a crisis that broke out in 2011, Zhou said.

During the credit crunch in 2011, many private business owners in Wenzhou were reported to have disappeared, committed suicide or declared bankrupt. This caused a surge in the number of lawsuits concerning private lending disputes in Wenzhou to 19,446 in 2012 from 2,896 in 2007.

In 2012, Zhejiang provincial higher court upheld a death sentence on Wu Ying, a businesswoman convicted of cheating investors out of several hundred million yuan. This underlined the need for private financing reform, according to Zhou, although the highly controversial sentence was later overturned by the country's top court.

Zhou said Wenzhou has set a good example for other regions, where private lending is active, to follow.

Almost half of families in China have been involved in private lending, according to a survey of more than 28,000 families published last month by the Survey and Research Center for China Household Finance at the Chengdu-based Southwestern University of Finance and Economics.

The figures show that about 49 percent of families in China's western regions had participated in private lending, around 46 percent in central China and 38 percent in eastern China.

Nearly 320,000 households in western regions offered high interest loans totaling 100 billion yuan in 2013, news portal xinhuanet.com reported on January 21, citing estimates from He Xin, a research fellow at the university.

"Wenzhou's regulation will pay an active role in standardizing private lending, but it won't be able to totally solve problems, such as small firms which face financing difficulties," said Feng Xianghe, an analyst at Beijing Unbank Investment Consultant.

Feng said more work should be done from a macro policy level. "The central bank's steady move to liberalize interest rates will increase the efficiency of the financial system, with cash-thirsty private enterprises having easier access to loans," he said.