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  • Jul 24, 2014
  • Updated: 8:36pm
BusinessBanking & Finance
UNDERGROUND BANKING

Underground banking may become thing of the past in Wenzhou

PUBLISHED : Saturday, 24 November, 2012, 12:00am
UPDATED : Saturday, 24 November, 2012, 3:59am

Wenzhou, the mainland's hub for private businesses, has taken a major step forward in legalising the underground banking system and liberalising capital outflow by publishing a guideline for a much-awaited financial reform.

The new rule aims to transform Wenzhou, plagued by a series of crises related to shadow banking, into the nation's financial services centre.

In March, Beijing endorsed the plan to begin a pilot project in Wenzhou, in a move to legalise shadow banking after dozens of local entrepreneurs committed suicide or fled as underground banks folded.

According to the new rule, Wenzhou will create a registration system for private capital and allow privately owned firms and individuals to participate in the "sunshine private lending" scheme, under which private capital can be lent out to individuals and businesses.

Over the past decade, private lending businesses in Wenzhou's illegal underground banking system helped thousands of local entrepreneurs access the much-needed money to finance their export-oriented manufacturing businesses.

Mainland authorities turned a blind eye to it all as the shadow banks benefited private businesses, which find it difficult to get loans from state-owned banks. But after the 2008 global financial crisis, underground banks were hit by a wave of loan defaults as borrowers, reeling from shrinking orders, began to default.

According to the new rule, the Wenzhou government will set up intermediary firms that will act as "matchmakers" for borrowers and lenders.

Yan Yipan, head of law firm Zhejiang Panyuan, said the central and local governments would have to lay down clear-cut guidelines for these intermediaries. "The reform is not a surprise," he said. "But businesspeople will still take a wait-and-see attitude before the officials categorically rule private banking as legal."

Under current laws, only financial institutions such as banks can take deposits and lend.

The new rule also states that Wenzhou residents would be encouraged to do "direct investments" abroad under a looser foreign-exchange control, without elaborating how the system will be made looser. Currently, mainland businesses and residents cannot invest in overseas businesses without government approval.

Underground banks help people illegally transfer funds abroad, with a large proportion going into Hong Kong stocks. The new rule says the "direct investments" do not include buying overseas-listed equities.

But a hedge fund manager said the relaxed control on capital outflow could still lead to misuse of the funds, and money would continue to pour into Hong Kong-listed mainland companies as some of the H shares are cheaper than the mainland's yuan-denominated A shares.

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