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Wenzhou: China’s Lending Laboratory

5/14/2012 12:46:25 PM    joyc.biz
Wenzhou, a major city in southeastern Zhejiang province, is located on eastern coast of China and also is at the heart of an official reform experiment that aims to alter the shape of China’s economy by loosening the government’s grip on the financial sector.

Analysts say " should the experiment succeed, those loan companies in Wenzhou and others like it will multiply and grow, giving rise to a more efficient financing model for the world’s second-largest economy. Failure would leave China vulnerable to a sharp slowdown."

“Reform is essential. Private companies create the growth and the jobs, but the banks aren’t willing to lend to them. State-owned banks only lend to big state-owned companies,” a Wenzhou private banker says.

Small and medium-sized enterprises generate about 65 per cent of China’s gross domestic product and 80 per cent of its jobs but they have received only a fifth of bank loans, according to government estimates.

“The old ways of promoting growth cannot go on for ever. China is facing constraints in its use of both resources and credit,” says Wang Tao, a UBS economist.

After averaging 10 per cent annual growth for the past decade, the Chinese economy is cooling, slipping to 8.1 per cent in the first quarter of this

year. Lu Ting of Bank of America Merrill Lynch forecasts that growth will cool further to about 6 per cent by 2020.

This slowdown is forcing China’s banks, long accustomed to flinging loans at large government-backed investment projects, to develop a new skill: identifying the dynamic private businesses that will drive the next generation of Chinese growth.

Financing SMEs has also climbed to the top of the national political agenda. As he prepares to step down next year, Wen Jiabao, China’s premier, has made unusually strident calls that the time has come “to break the monopoly” of the biggest banks.

To put his words into practice, the government has selected Wenzhou as a testing ground for what could be the biggest financial reform in China in a
decade, to cut borrowing costs for SMEs. In March the government said a pilot financial reform zone would be launched there.

“If the Wenzhou reforms are successful, the central government has said they will spread nationwide. So we are at the cutting edge,” says Wang Gang, a senior adviser to the project’s steering committee.





 



Source: Source: wenzhou