China mulls monitoring system on private lending

0 Comment(s)Print E-mail Xinhua, November 11, 2011
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The Chinese government is considering establishing a monitoring system for private lending activities after a severe debt crisis of small firms in east China brought the informal lending market into spotlight.

"Relative departments are studying, trying out and improving a tracking and monitoring system on private lending to provide more comprehensive information for economic decision making and macro-economic control," an official with the People's Bank of China, or the central bank, told Xinhua on Thursday.

Private lending should be better regulated and "brought into the sunlight" to boost a multi-level credit market, said the official, who declined to be identified.

The interest rate of private lending should not exceed four times that of bank loans of the same kind, said the official, citing an existing rule set by the Supreme People's Court.

The remarks came amid a credit crunch in the eastern city of Wenzhou, an economic hub known for its successful entrepreneurs.

Many small businesses in Wenzhou resorted to the high-interest informal lending market as they couldn't get bank loans after the government tightened lending to tame inflation. Many later found they could not repay the loans due to bad economic conditions and investment losses.

So far this year, one-fifth of the city's 360,000 small- and medium-sized enterprises (SMEs) have stopped operating due to cash shortages, and nearly 100 business owners disappeared or declared bankruptcy to invalidate debts owed to individual creditors from the private lending market, according to the city's council for SMEs.

"Private lending is a beneficial and necessary complement to the formal financing channels," the central bank official said, while urging crackdown on such crimes as illegal fundraising, usury and money laundering.

China's central bank has raised benchmark interest rates three times this year and hiked the reserve requirement ratio for lenders six times, making it hard for small businesses to borrow from banks.

The State Council, or China's cabinet, has cut taxes and ordered state-owned banks to ease the credit squeeze to salvage cash-strapped SMEs in Wenzhou after Premier Wen Jiabao's tour of the city on Oct. 5.

Wen emphasized the importance of SMEs in securing local jobs and urged for bank credit support and preferential tax policies.

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