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Legalization of private lending urged
( 2003-11-12 10:11) (China Daily HK Edition)

Private lending and fund raising among enterprises and individuals are supplementary to China's financial system and it is time to legalize them, some economists have said.

Such financial activities, which are conducted behind regulators' backs, have played a key role in funding the country's millions of small- and medium-sized enterprises (SMEs) that generally have difficulty borrowing from banks or tapping the capital market.

"Although SMEs find it very tough to get listed and have difficulty obtaining bank loans, they have been developing very fast," said Li Yang, a member of the central People's Bank of China's (PBOC) Monetary Policy Committee.

"There must be financing channels other than the current official categories," he said. The legitimate funding channels are bank loans, corporate bonds and stocks.

The value added at industrial SMEs rose by 17.9 per cent on a year-on-year basis to 1.4 trillion yuan (US$168 billion) in the first half of the year, outstripping the growth of gross domestic product by 7.9 percentage points, official statistics indicated.

"We need to give it (private funding) legal status," Li said.

Private money-lending is commonplace in many parts of China, especially in coastal provinces like Zhejiang where the non-State economy prospers.

In a recent Ministry of Agriculture survey that polled 217 families in 18 villages in East China's Anhui Province, as much as 79 per cent of loans were privately obtained with the rest from rural credit co-operatives.

"Indeed, private money-lending has never been a small amount (in recent years)," said Yuan Gangming, an economist with the Chinese Academy of Social Sciences. "In some places, they just depend on private funds."

Unofficial estimates have put the size of underground private fund-raising in Zhejiang alone at some 800 billion yuan (US$96.6 billion).

Xie Ping, director of the PBOC's research bureau, said such lending and fund-raising have developed to such levels where efficient intermediaries and unique punitive measures for loan defaults are in place.

Private lenders set interest rates by adding basis points to the official interest rate on one-year loans. And such loans are less prone to default due to the strong credibility constraints within small communities.

"It's very convenient and highly efficient," Xie said.

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