Wenzhou borrowing costs high despite underground bank reforms

Borrowing costs high despite Beijing move to legalise underground banks

PUBLISHED : Monday, 19 August, 2013, 12:00am
UPDATED : Monday, 19 August, 2013, 3:40am

Attempts to reform private lending in Wenzhou have failed with small firms continuing to pay high interest rates as liberalisation of banking falters, analysts say.

Underground banking became a thing of the past when Beijing gave Wenzhou, the port city in Zhejiang province with a strong free-market ethos, approval to implement financial reforms on a trial basis in March last year.

But businessmen complain they have not benefited from the much-hyped reforms.

"No change has taken place," said Chi Bangfa, an owner of a lubricant business. "I feel the business environment is even worse than before."

Beijing had sought to legalise the underground banks that had supported the city's economy over the past two decades as small businesses strove to meet overseas demand. But a credit crisis hit in 2011 when external demand weakened and the growth of the domestic economy slowed, forcing dozens of underground bankers and entrepreneurs to flee overseas. Some committed suicide.

The trial reforms aimed to encourage cash-rich entrepreneurs to register lending businesses with authorities.

Moreover, the local government set up a private lending centre to connect borrowers with lenders.

"The ideal system would enable cash-rich businesses and individuals to make better use of their funds and help manufacturers improve their businesses in an orderly and legal manner," said Yan Yipan, head of law firm Zhejiang Panyuan.

The city's financial services office said borrowing costs of microlenders and the private lending centre remained high because of a lack of interest. Annualised lending rates stood at more than 20 per cent, data from the office showed.

Authorities had thought that by legalising underground banks cash would flow to the microlenders and private lending centre and, consequently, lower borrowing costs. This does not appear to have happened.

It is estimated Wenzhou residents have a combined 600 billion yuan (HK$761 billion) of savings. Microlenders have collected only 10 billion yuan of capital, and less than one billion yuan of loans had been extended by the private lending centre.

Moneylenders cannot accept deposits. They depend on shareholder capital to make loans.

Wu Xiaoling, a former central bank deputy governor, had expressed hope that a number of village banks, after establishment by private investors, would drive Wenzhou's financial reforms. But private investors have not set up even one village bank so far.

Entrepreneurs said they wanted to participate in the rural banking sector but that policy hurdles prevented them.

Wenzhou's mayor, Chen Jinbiao, said this year there was a "glass ceiling" to crack before reforms could be pushed forward. That appeared to be a call for the central government to give policy incentives to Wenzhou to implement the reforms.