Wenzhou Microfinance Shoemaking Enterprises Or Restructuring Into Village Banks

China has approved it.

A man is riding a tricycle through the shoe area of Wenzhou. The car is full of shoes to be processed.

Wenzhou is famous for its large scale private enterprises.

The move of the State Council of China represents an important symbolic step towards the reform of the financial system.

For a long time, China's financial system has been seen as an obstacle to the establishment of a better and more sustainable growth model of the world's second largest economy.

The key test will be whether Wenzhou's reform will be promoted in other parts of China.

In recent years, many other reform measures promised by the government have not been fulfilled. The tendency of over regulation of the government may suppress innovation, so that private lending, which plays an important role but has legal doubts, has been underground operation.

The State Council said in a statement that it will allow private lending institutions in Wenzhou to set up investment enterprises in accordance with the law so as to expand their businesses to SMEs.

Small and medium-sized enterprises have been complaining that small and medium-sized enterprises are difficult to obtain loans because of the state owned large banks' favour of state-owned enterprises.

In the view of banks, the ability of state-owned enterprises to repay loans is guaranteed by a well funded Chinese government.

In addition, the State Council also said that the pilot of individual overseas direct investment in Wenzhou is being studied to provide residents with a channel to get higher returns than bank interest.

The interest rates of Chinese banks are often lower than the rate of inflation.

At present, China strictly restricts individual foreign direct investment.

According to the pilot scheme of Wenzhou, the total annual amount of individual overseas direct investment is not more than 200 million US dollars (a single investment does not exceed 3 million US dollars) for the establishment, acquisition or investment of non-financial enterprises in overseas markets.

Wenzhou residents can also reinvest overseas profits.

However, Su Xiangqing, director of the Wenzhou Municipal Bureau of foreign trade and economic cooperation, said that the State Council may also modify some of the contents during the audit process.

At the moment, the call for China's reform at home and abroad is getting higher and higher.

Wen Jiabao, premier of the State Council of China, said at a news conference this month that the development of private finance is not suited to the needs of China's economic and social development.

In addition, a report jointly issued by World Bank and a think-tank of the Chinese government in February this year called for a reduction in the size of state-owned enterprises.

Meanwhile, Guo Shuqing, chairman of the newly appointed securities and Futures Commission, has been seeking large-scale reforms in China's stock and bond markets.

An executive at a large Chinese bank said that the approval of Wenzhou's reform plan was extraordinary. At present, Chinese banks are unwilling to lend loans to SMEs, partly because banks lack professional expertise to assess risks.

Some bosses in Wenzhou welcomed this.

Qu Guoning operates a small wire and cable manufacturer, and there are hundreds of such enterprises in Wenzhou.

He has been struggling with the financing of the business expansion plan.

He said that the normalization of private lending can help us reduce the cost of financing.

China has announced the establishment of a comprehensive financial reform pilot area in Wenzhou.

The picture shows a worker in a shoe factory in Wenzhou.

Qu Guoning said he plans to expand the business to the field of home appliance manufacturing, which is more profitable but needs tens of millions of yuan in investment.

He said it was difficult to borrow money from banks.

How large the scale of underground lending activities in China is still unclear.

According to UBS estimates last October, the total size may be between 2 trillion yuan and 4 trillion yuan, that is, between 316 billion and 632 billion dollars.

According to experts, the specific process of legalizing informal financial activities may involve issuing licenses to existing underground banks, allowing them to operate as small loan companies, and setting up relevant provisions for deposit taking.

If such measures are taken, it will reflect that the informal financial sector as a deposit base is also expanding rapidly.

This sector will attract funds because of possible high returns, but if there are problems, depositors may lose their money.

In recent months, local media have reported many instances of underground banks being bankrupted and angry depositors being ignored.

Brookings Institution, a Chinese scholar at Eswar Institution, said that the momentum of the informal banking sector was strong and could erode the depositors' base of large banks, thereby bringing risks to the overall financial stability.

It is for this reason that China is taking measures to incorporate these informal banks into regulation, he said.

Even if we are going to spread some of these measures to other regions, there is still much to do in China.

Prasad said that China still has to liberate interest rates so that China's big banks can respond more to market forces, otherwise these reforms will not be effective.

He said that these measures to standardize the underground banking system can not replace the more fundamental financial reform.

Although China's central bank governor Zhou Xiaochuan recently said that the timing of interest rate liberalization has basically matured, there is no indication in the State Department's statement that the government is already preparing for liberalization of interest rates.

The Central Bank of China has to report to the State Council.

At the beginning of last year, the Wenzhou municipal government proposed relaxing the restrictions on overseas investment to the locals.

Later, Wenzhou officials came up with a new plan (almost the same as the original plan), as part of Wenzhou's overall plan to become a financial reform pilot.

Although it appears that the central government has been on the side of Wenzhou, the State Council's statement did not give a clear reply, but it is unclear how much freedom the central government will finally give Wenzhou residents on the issue of personal foreign direct investment.

Chinese officials are also faced with resistance from all sides.

On the one hand,

Last year, as Beijing tightened monetary policy, the financial pressure faced by private enterprises in Wenzhou was attracting the attention of the outside world.

Monetary policy tightening has increased the difficulty of obtaining loans or extending loans for small businesses in Wenzhou.

According to China's state media, more than 12 enterprises' bosses closed their factories and fled, leaving creditors behind.

In the traditional Chinese financial system, commercial banks play a leading role, and the interest rate of deposit and loan is formulated by the state.

This mode will pfer the cheap credit funds from family departments to state-owned enterprises, which is very effective for financial investment in infrastructure and capital intensive industries.

Analysts say the cost of these practices is beginning to outweigh the gains as China's economy is trying to break through the investment based growth model.

The cheap capital acquired by state-owned enterprises and real estate developers has led to the waste of investment.

At the same time, small private enterprises are unable to obtain loans.

The State Council statement also suggested that state-owned banks and joint-stock banks should increase various ways of loans to private enterprises, such as the establishment of credit institutions for small businesses.

But from past experience, such initiatives are often disappointing at the end.

State banks complain that China lacks credit rating agencies, and they are unable to assess the risk of such loans.

In 2011, the shadow banking system, which sprouted in the traditional banking system, caused widespread concern.

This system also provides credit, but interest is usually higher.

The Chinese government has dealt with a number of cases which seem very bad in its nature, including the Wu Ying case.

Wu Ying, an entrepreneur in Zhejiang Province, was sentenced to death for illegal fund-raising.

Wu Ying was found guilty of illegally raising $770 million to the public on the promise of high return on investment.

Wu Ying's attorney argued that she only borrowed the money from her friends and invested the money in profitable business.

The case led to social sympathy for Wu Ying.