China should legalise its underground financial markets which have grown popular among credit-hungry small and medium-sized enterprises (SMEs), an official from the State Development and Reform Commission said yesterday. 'SMEs are starving for loans and [the obtaining of loans] has become a matter of life or death for them,' Zhang Hanya , director of the State Development and Reform Commission's Institute of Investment Research, was quoted as saying by the 21st Century Economic Report. Instead of being seen as 'evil', informal credit services like underground money houses should be seen as providers of financial options to cash-strapped SMEs, Mr Zhang said. The recent round of macro-control measures imposed by the central government had intensified the funding problems facing such firms, especially those in rural areas, he said. More than 85 per cent of companies whose annual revenue is below 5 million yuan - the benchmark for SMEs - had been turned down by commercial banks when applying for loans, a recent study conducted by the Chinese Academy of Social Sciences' Private Economy Research Centre showed. A separate survey of China's 11 commercial banks drew a similar conclusion. SMEs find themselves two or three times more likely to be refused by lenders than their state-owned counterparts. As a result, SMEs have to turn to underground financial networks or other informal credit organisations, which have taken their chances and raised interest rates to as high as 20 per cent. In some places like the east coast city of Wenzhou , they are up to 40 per cent, industry insiders say. It is widely believed that private companies, the primary driver of growth and employment, suffered most from the recent credit curbs. The private sector, about 99 per cent of which is SMEs, produced more than two-thirds of national output, but received less than one-third of the bank loans, the newspaper said. Most commercial banks were reluctant to lend to SMEs because they were concerned about their ability to repay the money, Mr Zhang said. But SMEs were the most dynamic part of the Chinese economy, he said. Last year's official statistics show more than 55 per cent of the country's GDP, 46 per cent of the fiscal revenue and 75 per cent of new jobs came from small and medium-sized companies.