China Picks Wenzhou for Small-Business Funding Experiment

Wenzhou, the Chinese city where more than 80 indebted businessmen committed suicide or went bankrupt in six months last year, was chosen for a trial program that aims to improve funding and broaden investment.

Under a plan approved by the State Council yesterday, the coastal city will lead the nation’s task of regulating private funding, a practice that helped boost the growth of Wenzhou’s small businesses and is sometimes illegal in China. It will also develop more types of bonds and allow trading of unlisted equities, technology and cultural products, according to a statement on the government’s website.

The plan, first mentioned by Premier Wen Jiabao this month, is part of the government’s economic reform package to develop a more market-based economy after Wen visited Wenzhou in October. It seeks to create more funding opportunities for for private companies, which often resort to off-the-books lending as they struggle to get loans from state-owned banks.

“This is a big deal,” Dariusz Kowalczyk, a Hong Kong- based strategist with Credit Agricole CIB, said in an e-mail. “This will facilitate access to credit by the private sector, which is key for sustaining GDP growth at a time of overall economic slowdown.”

Investment Abroad

Individual investors in Wenzhou, who make 90 percent of China’s eyeglasses and exported lighters, will also be allowed to make direct investments abroad. The State Council also said it will encourage private capital to participate in setting up “innovative financial organizations,” including village and county banks, loan companies and rural credit unions, according to the statement.

The government also encouraged banks in Wenzhou to extend more loans to small enterprises after a collapse in some Wenzhou companies’ funding chains “exerted a certain impact on economic and social stability,” the Cabinet said in the statement.

Wen visited Wenzhou, in Zhejiang province, in the midst of private lending collapse, when more than 80 indebted businessmen in Wenzhou, a city of 9 million people, committed suicide or declared bankruptcy from April through September in 2011 because they were unable to repay informal lenders, the official Xinhua News Agency reported in October.

Wu Ying Case

In January, the Zhejiang Provincial Higher People’s Court upheld the death sentence for Wu Ying, a businesswomen convicted of defrauding investors of 380 million yuan ($60.2 million) from private lending channels. China’s Supreme People’s Court is reviewing her case.

The Wenzhou pilot program will help the city’s “healthy development” and is “significant” to the country’s financial reforms and economic growth, it said.

The proposal is “a positive step toward bring informal lending into the sunshine,” said Dong Tao, a Hong Kong-based economist at Credit Suisse AG. “This will help control financial risk, but success will depend on detailed measures.”

China’s economy expanded 9.2 percent last year after growing 10.4 percent in 2010. The country posted its largest trade deficit since at least 1989 in February as Europe’s debt crisis hurt exports.

The Cabinet asked Wenzhou to “regulate and develop” private financing, encourage individual funds to set up village banks or small lending companies, and support state-owned and commercial banks in setting up micro-lending institutions for small businesses.

Interest Rate Liberalization

Shenzhen Development Bank Co. (000001) said on March 8 that its fourth-quarter bad loan ratio climbed 26 percent due to increased lending to smaller businesses. Among its branches, the ratio was highest in Wenzhou, reflecting the difficulties faced by the city’s entrepreneurs, the bank said.

The statement didn’t give details on the trial of investment abroad by individuals. China Business News on March 22 quoted Zhou Xiaoping, head of the Wenzhou commerce bureau’s foreign economic cooperation department, as saying residents may receive a $200 million investment quota in the first year after approval of the plan.

Wang Qinwei, a London-based economist at Capital Economics, said even with the trial he doesn’t expect the government will move quickly on opening the capital account.

“Policy makers have good reason for caution,” Wang said, because rapid cross-border money flows may be “destabilizing” before the yuan is allowed to change value freely and the financial system is developed further.

Interest rate liberalization, which is “a precondition” for relaxing capital controls, didn’t appear in yesterday’s statement, he said.