Illegal fund-raising has tripped up several well-known Chinese private entrepreneurs, and in the process highlighted the difficulty some firms face in accessing capital.

Wu Ying, the mysterious billionaire in East China's Zhejiang Province, recently became the latest business owner to become entangled in a scandal involving illegally raised funds. Wu had allegedly raised money from the public in an illegal way to sustain her commercial empire.

What is unusual is that there has been some public sympathy for business owners. Many people have expressed concern that some business owners have fallen victim to a State-controlled financial regime that discriminates against private enterprises.

Behind such worries looms the fact that many private enterprises, mostly medium- and small-sized ones, do not have much access to funds in the financial market, leaving them starved of capital.

"The banks still have various restraints on lending to private enterprises," Huang Mengfu, chairman of the All-China Federation of Industry and Commerce (ACFIC), complained to a conference in January.

The State is aware of the problem. The government took a major step towards addressing it in 2005, when it issued the so-called 36-article guidelines on the development of non-State enterprises. They include a requirement that banks lend more to non-State companies.

Banking authorities have also required commercial banks to cater to the increasing demand for funds among private enterprises.

The authorities have also started to allow small-sized financial co-operatives and other grassroots financial institutions to operate in rural areas.

"Despite this progress, the difficulties involved in borrowing from banks remain a major bottleneck for private enterprises," Yu Dingzhu, deputy director of ACFIC, told China Daily.

However, commercial banks may be justified in avoiding private enterprises out of a concern for the quality of their outstanding loans.

"We have a comprehensive risk pre-warning system and specific lending criteria," said a manager at a Bank of China (BOC) branch in North China's Hebei Province, who asked to remain anonymous.

"Only enterprises that can meet those standards can get loans, regardless of whether they are State-owned or private."

Still, many private enterprises, especially small ones, cannot meet the requirements.

"Few of them have sound financial and accounting frameworks," said the manager.

Moreover, some businesses borrow relatively small sums of money, pushing up banks' operating costs, ACFIC's Yu said.

"Another factor is the traditional mentality that favors State enterprises," Yu added.

Beyond the banking system, the securities and bond markets have also failed to provide strong funding support to cash-hungry private enterprises.

In the Shanghai Stock Exchange, for example, private enterprises account for about 10-20 percent of market capitalization.

And when it comes to corporate bonds, regulators tend to favour big firms rather than the small private companies that really need funds.

"Only large-scale State enterprises are likely to be allowed to issue corporate bonds," Hu Zuliu, general manager of Goldman Sachs Group (Asia) Ltd, told a forum in Beijing in January.

He suggested that the government ease issuing procedures to develop the bond market and provide a convenient channel for ordinary enterprises to raise money.

As for access to loans, the government should devise and implement favorable policies, such as a more applicable guarantee system, to make it easier for private enterprises to get access to loans, ACFIC's Yu said.

The private sector has called for the establishment of non-State regional banks, which could provide services suited to the financial conditions of private enterprises, but regulators have not given the go-ahead.

"They may be concerned about the potential risks posed by the entry of private capital," said the anonymous BOC manager.

(China Daily 02/27/2007 page4)