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The State Council earmarked Wenzhou in Zhejiang province as pilot zone for financial reform on Mar 28, allowing local private capitals to invest overseas and set up loan companies.
Private economy accounts for 81.6 percent of national economy in Wenzhou. Private enterprises and businesses contribute 95.5 percent of gross industry output, 80 percent of tax, 95 percent of export and 93 percent of jobs in the city.
Yet, such a prosperous industrial center of small and medium-sized enterprises has not developed an correspondingly matured financial industry. It is difficult for private businessmen to get loans from banks. So underground loan companies of private capitals fill the gaps and lend money to private with exorbitant interest rates.
This move is of utmost importance for not only Wenzhou but also the whole country as a trial to standardize and regulate the financial market of private capitals nationwide. But there are still many practical problems to solve. For example, what role should the authority play in this reform and how to design a mechanism that can give a full play to the flexibility of private capitals?
No matter how the authority decides to approach these problems, some measures are necessary to realize the final objectives, which are naturally starting points of the complicated reform.
Private capitals should be included in current financial system. The authority need to draw up entry requirements to verify qualified civil financial activities and capitals, which should be done transparently. All qualified private capitals should be registered and supervised by both the administration and market.
The private loan organizations can take various forms, such as equity funds, village banks, loan companies, credit union of village capitals and civil capital management companies, to satisfy needs of different customers. The adaptability of these new forms of financial institutions are just their advantage over their State-run counterparts.
The authority should construct a credit investigation system for all small enterprises. Opening private capital market for private businesses does not necessarily mean it is easier to borrow for all enterprises. Only the credible enterprises can get loans from qualified private capitals in multiple convenient ways, including credit aid, equity investment, bond financing and stock financing.
The stability and order of a well performing private finance market actually benefits both loaners and borrowers in the long run. The debt crisis in the end of 2011 indicates usurious loans harm real economy and industry, which does no good to the loaners in fact.
It is advisable for the authority to link interest rate control of private loan organization with market changes. Although a compulsory cap may protect the borrowers, it will hinder the development of the private loaning business. A market-oriented interest rate mechanism is more efficient in allocating fund resources and avoid blinded expansion of loaning.
Another challenge is how to keep a balance between private financial institutions and State-owned ones to realize an optimal combination providing various forms of financial services and supports.
Only after answering all the relevant questions can we really call the pilot reform in Wenzhou a milestone step to initiate a nationwide financial reform.
By Zhang Wangbin