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State Council allows private finance to play a bigger role
Wenzhou won Beijing's approval on Wednesday for a landmark financial pilot project that will allow residents of the coastal city to, among other things, invest privately overseas and set up loan companies.
At a State Council executive meeting chaired by Premier Wen Jiabao, the government selected Wenzhou in eastern Zhejiang province, a city with a deep tradition of entrepreneurship, to be a "pilot zone" for a series of financial reforms.
The decision was hailed as a "milestone" by Wang Jianhui, chief economist with Southwest Securities, as it showed the government's determination to lead "the reforms that are urgently needed".
Owners of private businesses welcomed the move. "I see a lot of new investment opportunities coming up," said Zhu Jianfeng, general manager of Gold Emperor Group, a Wenzhou-based shoemaker. "We will wait for the full details to emerge and then see what we can really do."
The State Council decision covered 12 major points, which include developing privately owned financial services, setting up village banks and rural financial co-ops and encouraging lending by State-owned banks to smaller businesses.
The government of Zhejiang province was required by the State Council to set up a working group to lead the implementation of the reform program and to work closely with the People's Bank of China.
A communique after the cabinet meeting said: "It is imperative to launch comprehensive financial reform in Wenzhou in order to iron out long-standing problems in local economic development and lead private fund-raising activities to develop in an orderly way to strengthen their capability to serve the real economy."
Such comprehensive financial reform is "of the utmost importance, not only for Wenzhou, as it can serve as an example for financial reform and economic development nationwide," it said.
Earlier this month Wen told a news conference after the National People's Congress that the government was considering an overhaul of legislation that banned private fund-raising by businesses and individuals.
The comments came in response to a question about private fund-raising and the case of Wu Ying, a businesswoman who faces execution for illegally raising 770 million yuan ($123 million). The case is awaiting final review by the Supreme People's Court.
Wenzhou was selected for the pilot project after local debt-laden entrepreneurs, unable to repay debts, fled the city last year when State-owned banks reduced lending to small and medium-sized enterprises (SME) amid credit-tightening measures by the central bank.
SME proprietors frequently complained about discriminatory treatment from large banks because of their fewer assets and lack of credit records.
To keep business running, many Wenzhou SMEs had to resort to seeking underground credit with exorbitant interest rates, sometimes as high as 90 percent.
As a result, financial institutions in Wenzhou reportedly saw their non-performing loans surge nearly fourfold.
These loans amounted to 11.24 million yuan by the end of February, up 19 percent month-on-month, China Business News reported, suggesting that the current economic slowdown and flagging property market were leading to still more defaults.
The pilot program will "set free the power of Wenzhou's private capital," said Zhou Dewen, chairman of Wenzhou SME Development Association. "What we will see will be a new growth cycle of non-State sector investment and financial services."
At the same time, Ye Tan, an independent financial commentator, said letting citizens invest directly overseas would also help ease the plight of entrepreneurs.