China will soon begin a trial to bring a multi-billion-dollar sector of its grey economy into the open by legalising a raft of unlicensed money lenders, state media and an official said yesterday.
The first batch of licensed small lending houses will start operations in eastern China's Zhejiang province in September on a trial basis, the Shanghai Securities News reported, citing an unnamed source.
Local authorities confirmed that the plans were underway, but refused to disclose details, such as how many lenders would be involved in the trial.
"We are mobilising to carry out the trial programme," an official with the local branch of the China Banking Regulatory Commission in Wenzhou city of Zhejiang said on the phone, without elaborating on the timetable.
China's burgeoning small and medium-sized private firms have found it difficult to obtain bank loans because of a lack of collateral and solid credit records.
But their financing demands have cultivated many underground lenders in a lucrative industry, particularly in wealthier exporting powerhouses in coastal areas such as Zhejiang.
These underground lenders have operated in a grey area, officially illegal but with authorities well aware of their existence and in some cases supportive of them.
The Shanghai Secruities News estimated the underground lenders in Zhejiang alone, dubbed as "grassroot financiers," might operate funds worth at least one trillion yuan (146 billion dollars).
The China Banking Regulatory Commission and the central bank set out guidelines in May laying out the framework for how the small lenders could be brought into the legal system.
They will be "encouraged to provide loans to farmers and micro businesses," but not allowed take deposits, according to the guidelines.
The small lenders with limited liabilities will be required to have registered capital of at least five million yuan, while the minimum registered capital for stockholding firms is 10 million yuan.
Lending houses can borrow up to 50 percent of their net capital from banks, the agencies said.