China's widespread private lending market, widely known butunofficially recognized, is getting special government treatment inthe wake of credit calamities in Wenzhou, Zhejiang Province,China's private financing hub. A comprehensive financial reformpilot area is in the works for the city, said Premier Wen Jiabao ata State Council meeting on March 28. The pilot area should encourage and guide private capital to enterthe field of official financial services, ensure smooth access toinvestment channels for private capital and improve the financialservices to small and micro-enterprises and rural areas, accordingto Zhou Xiaochuan, Governor of the People's Bank of China, thecentral bank. By carrying out the reform, Wenzhou should be able to effectivelyimprove the capability of turning private capital into industrialcapital, Zhou said.
Wenzhou's large number of active private lenders and smallbusinesses are the main reason for the government's decision tolaunch the pilot program in the city. Official statistics show thatthe private capital in Wenzhou amounted to 600 billion yuan ($95.2billion) last year. Small and medium-sized enterprises accountedfor 99 percent of the city's total. "The reform will pull Wenzhou's real economy out of the predicamentit now finds itself in and regain the reputation of Wenzhou'sprivate enterprises," said Zheng Chen'ai, Director of WenzhouFashion Association.
"The government aims to test the waters through Wenzhou and thenaccumulate experience for the nationwide reform," said GuoTianyong, Director of the Research Center of China Banking Industryat the Central University of Finance and Economics. Why Wenzhou? The establishment of the comprehensive financial reform pilot areain Wenzhou will serve two purposes: bringing underground privatelending in the sunlight and regulating private lending, said ZhangZhenyu, Director of Wenzhou Finance Office. The private lending industry in China was estimated to have grownto 4 trillion yuan ($634 billion) last year, according to aresearch report issued by CITIC Securities based in Beijing. In Wenzhou the size of this industry was about 180 billion yuan($28.57 billion), with nearly 90 percent of the city's residentsinvolved in the loan-shark business, according to the Bank ofWenzhou, the biggest local commercial bank. According to Fang Peilin, Chairman of Wenzhou Fang Xing GuaranteeCo., which helps small companies get loans by providing guaranteesto lenders, the monthly interest rate for private lending inWenzhou reached 3 percent.
"The extraordinarily high interest rate was unreasonable forenterprises, because the average profit margin was no more than 15percent," said Ma Jinlong, former Director of Wenzhou People'sGovernment Economic Research Center. As the credit crunch unfolded last year, bosses of companies thatfaced bankruptcy or had run out of funds took flight, boarding upfactories and abandoning their businesses. After the private lending default last year, the original privatelending system based on personal trust almost broke down, Fangsaid. Although the government vowed to increase lending to smallerenterprises, state-owned banks that dominate the Chinese bankingsector prefer to lend to well-connected state firms that can allbut guarantee that the money will be repaid.
Wenzhou's creditcrunch last year has made lending for small enterprises even moredifficult to come by. With banks unwilling to provide small and micro-companies withfinancing, these companies have had nowhere to turn for capital butprivate, underground lenders. The idea of changing Wenzhou's financial environment first emergedin late 2011, and the long-awaited decision came as undergroundprivate financing activities in Wenzhou have stirred up financialdisputes and crime while threatening Wenzhou's financial andeconomic stability. Highlights The reform program will cover 12 major tasks, including regulatingand developing private financing, encouraging individual funds toset up rural banks or small lending companies, supporting lendingby state-owned banks to smaller businesses and allowing individualinvestors to make direct overseas investment. I am an expert from Rubber & Products, usually analyzes all kind of industries situation, such as custom photo collage , oriental hand fans.
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