Legalise underground banks, delegates urge

PUBLISHED : Monday, 12 March, 2012, 12:00am
UPDATED : Monday, 12 March, 2012, 12:00am


Related topics

Delegates to the mainland's top political advisory body have called for underground banks that operate in the grey area of informal lending and fund-raising to be legalised.

The proposal came at the Chinese People's Political Consultative Conference (CPPCC) in Beijing, and if adopted could give cash-strapped small and medium-sized enterprises (SMEs) access to the credit they are often unable to obtain in the formal lending sector.

It could also help avoid a repeat of controversial charges brought against billionaire Wu Ying , say scholars and entrepreneurs.

Zhejiang tycoon Wu (pictured) is awaiting a final decision from the Supreme People's Court, after being sentenced to death for raising funds with the intention to defraud. She has denied any wrongdoing. The sentence drew an unprecedented public outcry amid calls for mercy. Scholars entered the fray with accounts of a culture of underground banking that was deeply rooted in provinces such as Zhejiang.

Such informal lending practices could be traced to ancient times, when they were used by those needing large amounts of money to start up businesses at a time before banks even existed, said Ming-Jer Chen, a professor at the Darden School of Business at the University of Virginia.

People from the same villages, very often relatives and friends, would pool money to support those in need of cash, in return for an interest payment.

Although such informal lending channels are now defined as illegal on the mainland, prohibition never halted all the underground banking. Media reports of people losing money through such lending groups persisted throughout the 1980s and 1990s.

'They have this kind of culture in Zhejiang and people are willing participants. All the government needs to do is to make sure that the money really is used for investment and there isn't any fraud,' said Zhang Xiaoji, a scholar at the Development Research Centre (DRC) of the State Council.

'There have already been much more serious cases than Wu Ying's,' said Wang Yongzheng, president of the Yong Zheng Tailor Shop in Tianjin. 'The majority of underground banks are still in operation. If you know about this, why don't you try to regulate it? Even if you kill them all, what's the use?'

The persistent demand for such underground funding showed it provided an important form of financing, catering specifically for SMEs, that still awaited development in the formal sector, scholars said.

CPPCC member Li Wuwei, head of economics research at the Shanghai Academy of Social Sciences said it was time to break the state's dominance in the banking business and institutionalise facilities that could better serve SMEs.