China sets up emergency fund to help business

An emergency fund has been set up in China's eastern city of Wenzhou to help cash-stricken businesses and individuals meet financing needs, the China Securities Journal reported on Wednesday.

After Beijing clamped down on credit to fight inflation, some private firms have to borrow money on underground markets that pool money from individuals and firms.

A string of private company bosses in Wenzhou, China's entrepreneurial hub and the capital of coastal Zhejiang province, have skipped town after failing to repay such loans.

Zhejiang Zhongan Guarantee Group is the main sponsor of the fund, which will first raise 1 billion yuan ($157 million) before gradually increasing it to around 5 billion yuan, the paper said.

The Wenzhou city government and local branches of Industrial and Commercial Bank of China and China Construction Bank will also take part in the pilot scheme.

A Wenzhou government official said that the city will set up non-governmental financing institutions on a trial basis, including micro-finance companies, private capital management companies and registering centers for private financing, Xinhua News Agency reported.

The city was recently hit by a debt crisis, in which at least 80 business people were reported to have disappeared, committed suicide or declared bankruptcy, Xinhua said.

Authorities estimate the fleeing company bosses owe more than 10 billion yuan in total debt to individual creditors pooled from the informal lending market.

China's Premier Wen Jiabao visited Wenzhou in early October, telling banks to lend more to small firms and tolerate high levels of bad loans from them, while demanding a crackdown on the high-interest underground lending market.

The Chinese central bank estimated the underground credit market was worth 2.4 trillion yuan as of the end of March 2010, or 5.6 percent of China's total lending.