Wenzhou breaks new ground on private lending

Wenzhou's financing management regulation, the first local legislation covering private lending, was voted through on Friday at the sixth meeting of the 12th Standing Committee of the Zhejiang provincial people's congress.

It's viewed as a breakthrough to monitor and regulate private financing activities, as well as a model for other parts of the nation.

The goal of the regulation, which takes effect in March 2014, is to ease the funding problems of small and medium-sized enterprises by establishing a more regulated financial system in the city of Wenzhou, which was selected to undertake a financial reform pilot project at the end of March 2012.

That was shortly after the city's private-financing system nearly collapsed, following widespread loan defaults by hard-pressed factory owners and investors.

The local financial management bureau, a new government department, was set up to supervise and regulate companies conducting financial activities, including moneylenders, loan brokers, pawnshops and investment consultants.

"The regulation will promote the development of the private-financing environment and boost the real economy by providing detailed restrictions and more diverse financing channels," said Li Youxing, a professor at the Guanghua Law School at Zhejiang University and a member of the team that developed the regulation.

Li noted that a hotly debated provision of the rules that would have capped loan rates at 48 percent annually had been dropped. However, interest rates will still be "more flexible" within the regulated interest rate regime established by the central bank.

The law also provides the nation's first requirement for a mandatory record of loans. If a single loan exceeds 3 million yuan ($490,000), or more than 30 people are involved as lenders, the borrower must record the agreement with the local financing management bureau within 15 days after the deal is signed.

"The launch of the record system will offer a fair and transparent platform for borrowers and lenders to conduct lending in a safer, regulated environment," said Li.

The regulation is the first instance in China of legalizing dedicated bond issues and dedicated fundraising as enterprise funding methods.

Under the new rules, companies may issue privately placed, dedicated bonds to finance their production and operations.

"The direct beneficiaries will be SMEs experiencing financial problems, because they will have more avenues to raise money legally under the protection of the regulation," said Zhou Dewen, the chairman of the Wenzhou SME Development Association.

Zhou added that the law will also reduce the risks for individuals and enterprises taking part in private lending activities. It will also ultimately increase the fiscal revenue of the local government.