Landmark Wenzhou lending law set to take effect

Wenzhou's financing management regulation, the first local legislation covering private lending, will take effect on March 1.

The regulation was voted through on Nov 22, 2013, at the sixth meeting of the 12th Standing Committee of the Zhejiang Provincial People's Congress.

It's been called a breakthrough to monitor and regulate private financing activities, as well as a model for the nation.

The regulation is intended to be a formal solution to the financing problems of small and medium-sized enterprises by providing a more regulated system in Wenzhou.

The city was selected to conduct trials of financial reforms at the end of March 2012. Regulators and lawmakers recognized the need to regulate the collapsing private-financing system after widespread loan defaults by factory owners and investors led to a crisis.

The draft regulation was submitted by the city's finance office to the Zhejiang provincial government for final review in November 2012.

"The regulation will promote the development of the private-financing environment and boost the real economy by providing detailed restrictions and more diverse financing channels," said Li Youxing, a professor at the Guanghua Law School at Zhejiang University and a member of the drafting team.

A detailed version of the regulation was drafted by the city government, and it will be finalized by the end of February.

Operating guidelines are expected to be issued in conjunction with the legislation that will clarify definitions and specify the procedures for dedicated bond issues and dedicated fundraising.

"The regulation will create more financing platforms and instructional guidelines", said Fang Dalin, an official in charge of the implementation of the regulation at Wenzhou's financial office.

Fang added the detailed regulations, with their clearer definitions, are intended to encourage more private lending participants to put their financing activities on record, providing the protection of the law thereafter.

Mandatory records

Mandatory recording of loans will be provided for by law for the first time in China.

If a single loan exceeds 3 million yuan ($495,000) or the number of lenders is more than 30, the borrower must record the agreement at the local financing management bureau within 15 days after the deal is signed, under the regulations.

The city has opened 11 registration centers for this purpose.

The nation's first private lending credit database will also be launched formally on March 1.

"The launch of the record system and the database will offer a fair and transparent platform for borrowers and lenders to carry out transactions in a safer, regulated environment," said Fang.

The regulation is the first instance in China of legalizing dedicated bond issues and dedicated fundraising as enterprise funding methods.

Private placements

Under the regulation, companies may conduct private placements of bonds for specific purposes involving productive operations.

The companies' asset-liability ratios should be less than 70 percent after the debt issue.

"The direct beneficiaries will be SMEs experiencing financial problems, as they can use more methods to raise money legally," said Zhou Dewen, chairman of the Wenzhou SME Development Association.

Zhou added the law will also lower the risks of individuals and enterprises engaged in private lending activities, as well as increase the fiscal income of the local government.

"The regulation will create a more secure environment for trustworthy private lending activities, with more people willing to put money into and reboot the private capital market in Wenzhou sooner or later," said Fu Jiarong, the manager of Wenzhou Jiexin Small-Sum Loan Co.