China Starts Allowing Private Lending in Wenzhou, Xinhua Says

China will legalize private lending in the eastern city Wenzhou as the nation’s government seeks to improve smaller companies’ access to credit, according to the official Xinhua News Agency.

Detailed rules for the pilot program, under the Wenzhou Private Financing Regulation, were completed this week and come into effect today, Xinhua said yesterday, citing Zhang Zhenyu, deputy secretary-general of the municipal Communist Party committee and head of the city’s finance-reform office.

The financial reform in Wenzhou underscores the government’s recognition of the plight of small businesses in China, which have been sidelined in the nation’s credit binge in the past few years despite accounting for 60 percent of economic output and 80 percent of jobs. An official report scheduled for later today is estimated to show manufacturing expanded last month at the slowest pace since June. Lawmakers in China meet next week to decide on major economic policies.

In 2011, company failures in the city of about 9 million people sparked a series of suicides and some entrepreneurs were paying interest of as much as 7 percent a month to illegal lenders to try to keep their businesses afloat.

The Wenzhou regulation allows lending through private capital management firms, financing information service firms and lending service institutions, three types of intermediaries that aren’t part of the legal financial system elsewhere in China, according to Xinhua’s report yesterday.

The lending service institutions keep record of lenders of more than 3 million yuan ($488,000) in a single private loan and collective loans with combined values of over 10 million yuan each, Xinhua said. Seven such service centers in Wenzhou with registered capital of 7 billion yuan had 2.5 billion in outstanding loans on Dec. 12, according to Xinhua.

In the city with many small companies selling products such as buttons, cigarette lighters and shoes, 89 percent of households and 60 percent of local firms were involved in private financing, with total capital estimated at 110 billion yuan, Xinhua said, citing a 2011 survey by the local branch of China’s central bank.

To contact Bloomberg News staff for this story: Feiwen Rong in Beijing at frong2@bloomberg.net

To contact the editor responsible for this story: Brett Miller at bmiller30@bloomberg.net

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