Legitimizing Private Lending

China's widespread private lending market, widely known but unofficially recognized, is getting special government treatment in the wake of credit calamities in Wenzhou, Zhejiang Province, China's private financing hub. A comprehensive financial reform pilot area is in the works for the city, said Premier Wen Jiabao at a State Council meeting on March 28.

The pilot area should encourage and guide private capital to enter the field of official financial services, ensure smooth access to investment channels for private capital and improve the financial services to small and micro-enterprises and rural areas, according to Zhou Xiaochuan, Governor of the People's Bank of China, the central bank.

By carrying out the reform, Wenzhou should be able to effectively improve the capability of turning private capital into industrial capital, Zhou said.

Wenzhou's large number of active private lenders and small businesses are the main reason for the government's decision to launch the pilot program in the city. Official statistics show that the private capital in Wenzhou amounted to 600 billion yuan ($95.2 billion) last year. Small and medium-sized enterprises accounted for 99 percent of the city's total.

"The reform will pull Wenzhou's real economy out of the predicament it now finds itself in and regain the reputation of Wenzhou's private enterprises," said Zheng Chen'ai, Director of Wenzhou Fashion Association.

"The government aims to test the waters through Wenzhou and then accumulate experience for the nationwide reform," said Guo Tianyong, Director of the Research Center of China Banking Industry at the Central University of Finance and Economics.