The Hot Zone
China's newly announced air defense identification zone over the East China Sea aims to shore up national security
Current Issue
· Table of Contents
· Editor's Desk
· Previous Issues
· Subscribe to Mag
Subscribe Now >>
Expert's View
Market Watch
North American Report
Government Documents
Expat's Eye
Photo Gallery
Reader's Service
Learning with
'Beijing Review'
E-mail us
RSS Feeds
PDF Edition
Reader's Letters
Make Beijing Review your homepage
Hot Links

cheap eyeglasses
Market Avenue

Cover Stories Series 2012> A Roadmap for Change> Archive
UPDATED: May 7, 2012 NO. 19 MAY 10, 2012
Breaking Up Banking Monopolies
China needs to revitalize the real economy and free up capital for small businesses
By Lan Xinzhen

Wu Ying, 31, former legal representative of Zhejiang Bense Holding Group, was detained by the public security bureau for her involvement in illegal fundraising on March 16, 2007. Jinhua Intermediate People's Court of Zhejiang Province sentenced Wu to death for fraud on December 18, 2009. Zhejiang Higher People's Court affirmed the death sentence on January 18, 2012.

This death sentence aroused public debate on whether the businesswoman should be executed for her crime. Online, most people sympathize with Wu and think her crime doesn't warrant a death sentence. Others believed Wu and other cases are institutional tragedies.

Probably due to public pressure, the Supreme People's Court decided on April 20 to reject the death sentence for Wu and sent the case back to Zhejiang Higher People's Court for retrial. The death sentence will probably be reversed.

"The financial reform experiment in Wenzhou will open a window for private finance to enter the banking sector," said Yi Xianrong, a researcher at the Institute of Finance and Banking of the Chinese Academy of Social Sciences. "Its significance should not be underestimated in pushing forward China's reform of the financial market, particularly the reform of the complete financial system."

According to Yi, where private lending is active, local economies are usually more developed. Most of the funds from private lending have gone to the real estate market, and most of the funds used for private lending ultimately come from the banking sector. If private lending collapses, it will not only damage the economy in China's most prosperous east coastal areas, but also seriously affect China's real estate market and the banking system as a whole. At present, the scale of private lending in China totals 4 trillion yuan ($634.92 billion), and the amount of capital lent "under" Wenzhou has surpassed 120 billion yuan ($19.05 billion).

"Problems of Chinese private lending are the result of strict control over the legal financial system. The most important thing for the experiment to be carried out in Wenzhou should be to legalize present private lending and then regulate private lending in China. It is important for China's financial reform," Yi said.

In the detailed plan for financial reform, Wenzhou proposes to establish micro-credit companies based on private capital and make them cover all the townships. This year, the city is to set up 30 micro-credit companies with net assets of 20 billion yuan ($3.17 billion). By the end of 2013 the number of micro-credit companies in Wenzhou will reach 100, with net assets totaling 40 billion yuan ($6.35 billion).

Zhou Dewen, Vice Chairman of the China Association of Small and Medium-Sized Enterprises, said encouraging private investment through financial reform not only can consolidate the development of the Chinese private economy, but also further promote the private economy to make bigger contributions to China's economic development.

He also said to regulate private lending and promote private investment, the government should formulate game rules on private investment. Now the most important thing is, when legalizing private lending, China needs to make laws on private investment and financing to regulate and protect these activities.

Benefiting SMEs

Cao Fengqi, Director of the Research Center of Finance and Securities of Peking University, said financial reform will significantly influence the financing for SMEs. "To legalize private lending will be beneficial to SMEs and can solve their financing difficulties to some extent," he said.

Today, SMEs make up more than 90 percent of all enterprises in China. SMEs also contribute more than 60 percent of the GDP, 80 percent for urban job opportunities and 50 percent of the country's tax revenues. Furthermore, 65 percent of the country's invention patents and 80 percent of the research and development of new products are from SMEs.

Development of SMEs needs financial support, but financing difficulties have long been an unsolved problem. According to a report on the development of Chinese SMEs released by the All-China Federation of Industry and Commerce in 2011, more than 90 percent of the surveyed owners of privately owned SMEs said they could not get loans from banks.

According to the report, the real reason is that monopolies by the four biggest state-owned commercial banks have gradually reduced the financial resources that small and medium-sized banks can get, restricting their capability to serve SMEs. To seek profits and avoid risk, the four biggest state-owned commercial banks are reluctant to offer loans to SMEs.

Difficulty in acquiring loans from legal financial institutions has led SMEs to turn to private lending, which has no legal status in the financial legal system. Due to unsound financial laws, legal private lending activities are not clearly defined against crimes of illegal fundraising or fundraising fraud. Many enterprises don't dare to borrow private capital and are forced into bankruptcy.

The financial reform this time will legalize private lending, which could rescue these SMEs.

The financial reform in Shenzhen proposes two important policies in supporting SMEs: offering favorable loans to emerging strategic industries as well as micro and small enterprises, and nurturing a multi-market and multi-level financial system.

Grassroots appeals

The 12 tasks for the financial reform in Wenzhou were designed by the China Banking Regulatory Commission and the Central Government. The Wenzhou government and market participants such as private lenders and borrowers were excluded from the process, leading to doubt on the thoroughness of the reform.

A report of the Guangzhou-based Southern Weekend said, "An anonymous investor in Wenzhou has found the intention from the 12 tasks that 'no one in the decision-making level really wants to break monopolies.' He said only if real privately owned banks are created 'can the financial monopoly be broken by setting up some micro-credit companies in Wenzhou.'"

Hence Zhou thought there are arguments on whether the financial reform should be designed by the Central Government or local governments.

The financial reform Zhou wants should be designed from the ground up because this will better cater to the wants and needs of market participants.

   Previous   1   2   3   4   Next  

Top Story
-Protecting Ocean Rights
-Partners in Defense
-Fighting HIV+'s Stigma
-HIV: Privacy VS. Protection
-Setting the Tone
Related Stories
-Financial Reform Seeks Breakthrough
Most Popular
About BEIJINGREVIEW | About beijingreview.com | Rss Feeds | Contact us | Advertising | Subscribe & Service | Make Beijing Review your homepage
Copyright Beijing Review All right reserved