Underground banking may become thing of the past in Wenzhou

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.