Zhejiang helps lenders aid small firms

PUBLISHED : Wednesday, 09 November, 2011, 12:00am
UPDATED : Wednesday, 09 November, 2011, 12:00am


Zhejiang province took a step towards bolstering lending to cash-hungry small firms by allowing providers of small loans to raise more capital for loans.

According to the provincial government's website, small lenders can borrow as much as 100 per cent of their own capital to fund lending businesses, up from the previous 50 per cent.

The easing of restrictions on the microcredit companies follows the announcement by the government of Wenzhou, Zhejiang, last week of a plan to launch a 5 billion yuan (HK$6.1 billion) emergency fund. 'The new rules are aimed at relaxing the controls on small-loan firms so as to help them grow stronger and healthier in a sustainable way,' the government said.

Zhejiang's privately owned businesses have borne the brunt of Beijing's monetary tightening this year. Thousands of companies were forced to close down.

Wenzhou, known for its private businesses, has been plagued by crisis after crisis, after dozens of illegal underground banks collapsed amid an increasing number of loan defaults.

The provincial government's new measures are being seen as a lifeline for privately owned businesses, although economists said it would not be enough to solve the problem.

The China Banking Regulatory Commission began to allow domestic firms and residents to set up microcredit firms in 2006, which could offer petty loans to clients.

Before, only banks and rural credit co-operatives were allowed to offer loans to businesses and to individuals.

The small-loan firms were required to have a registered capital of more than 50 million yuan and they were not allowed to take deposits. They could offer loans at interest rates a maximum of four times rates set by the central bank.

Zhejiang had 134 small-loan firms by the end of last year, with total net assets of 23 billion yuan.

Based on the new rule they can borrow an additional 11.5 billion yuan to replenish their lending businesses. However, that pales in comparison with the central bank's estimate of the total in loans outstanding loans to underground banks in Wenzhou - 110 billion yuan. Dozens of entrepreneurs have fled in recent months after failing to repay loans, as have operators of underground banks unable to repay depositors.

Premier Wen Jiabao was forced to pledge stronger financial support for embattled companies on visit to Wenzhou. But Zhou Dunren, an economist and a professor at Fudan University, said: 'The top leaders don't seem to have a full understanding of the bad situation. China's economy needs substantial policy changes rather than expressions of support.'

Mainland banks are seen as biased against privately owned businesses and reluctant to extend credit to them.