Commentary: Experimental financial reforms

New measures aim to legalize private lenders, ease SMEs' funding difficulties and open up more investment channels

On the basis of the State Council's approval for comprehensive financial reforms in Wenzhou and a targeted regulation jointly issued by the People's Bank of China and another eight State departments, the Zhejiang provincial government published details of the reforms on Friday, which drew extensive attention from home and abroad.

The move came after an underground banking crisis erupted in Wenzhou in September last year. Due to concerns that the crisis might spread to the country's normal financial system and perhaps trigger broader financial risk, the central government immediately gave the green light to launch experimental financial reforms.

The specific reforms so far revealed show that the goals include easing the financing difficulties of small and medium-sized enterprises and increasing domestic and overseas investment channels for private capital. However, the reforms should have a wider range. The financing difficulties facing SMEs do not exist in Wenzhou alone; and while there are already overseas investment channels for the overflowing local private capital, even mature channels in developed financial markets can hardly satisfy all needs of individual investors.

A key target of the financial reforms in Wenzhou should be to bring its booming underground financial sector, which has grown particularly rampant in recent years, into the open and then onto legal and normal operating tracks.

With a high degree of openness to the outside and the success of its export-driven economic model, Wenzhou has taken the lead in capital and wealth accumulation. Such an environment has resulted in the fully fledged development of small and medium-sized private enterprises, which account for 96 percent of the city's industrial enterprises. Against this backdrop, the private credit market has flourished. Surveys indicate that about 90 percent of households and enterprises in Wenzhou have participated in non-governmental financing. A decade ago, around 90 percent of private financing was targeted at the real economy, but nearly 70 percent of it has flown to the housing market or unlicensed credit in recent years. The interest rates for private credit can be up to 100 times higher than official lending interest rates.

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