Beijing: Wenzhou, a provincial Chinese city which is famous for small-scale industries, has been picked up for a landmark financial pilot project that aims to improve funding and broaden investment.
The city, which recently made international headlines after owners of a number of companies either ran away, attempted suicides or held for non-payment of staff salaries following squeeze on bank loans, can now raise capital through private financing.
The Chinese cabinet headed by Premier Wen Jiabao, selected Wenzhou in eastern Zhejiang province, a city with a deep tradition of entrepreneurship, to be a "pilot zone" for a series of financial reforms, official media here reported.
The decision was hailed as a "milestone" by Wang Jianhui, chief economist with Southwest Securities, as it showed the government's determination to lead "the reforms that are urgently needed".
Earlier this month Wen told media here that the government was considering an overhaul of legislation that banned private fund-raising by businesses and individuals.
The comments came in response to a question about private fund-raising and the case of Wu Ying, a businesswoman who faces death sentence for illegally raising 770 million yuan (USD 123 million).
The case is awaiting final review by the Supreme People's Court.
Wenzhou was selected for the pilot project after local debt-laden entrepreneurs, unable to repay debts, fled the city last year when state-owned banks reduced lending to small and medium-sized enterprises (SME) amid credit-tightening measures by the central bank.
SME proprietors frequently complained about discriminatory treatment from large banks because of their fewer assets and lack of credit records.
To keep business running, many Wenzhou SMEs had to resort to seeking underground credit with exorbitant interest rates, sometimes as high as 90 percent.
As a result, financial institutions in Wenzhou reportedly saw their non-performing loans surge nearly fourfold.
These loans amounted to 11.24 million yuan by the end of February, up 19 per cent month-on-month, China Business News reported, suggesting that the current economic slowdown and flagging property market were leading to still more defaults.
Owners of private businesses welcomed the move. "I see a lot of new investment opportunities coming up," said Zhu Jianfeng, general manager of Gold Emperor Group, a Wenzhou-based shoemaker.
"We will wait for the full details to emerge and then see what we can really do."
The cabinet decision covered developing privately owned financial services, setting up village banks and rural financial co-ops and encouraging lending by State-owned banks to smaller businesses.
First Published: Thursday, March 29, 2012, 14:16