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ZHEJIANG is one of the richest and most developed provinces on China’s mainland. It has been leading economic growth since the very beginning of the country’s opening-up and reform. The coastal province is among the top four regions by GDP output and third by income per family. It is also one of the areas with the highest life expectancy, at 72.9 years, and literacy rate and has one of the narrowest urban-rural gaps in the country.
Zhejiang has a booming export-oriented economy and one of the biggest private sectors in China, which produces 70 percent of its GDP. Among its cohort of private brands are such heavyweights as e-commerce giant Alibaba and China’s largest and the world’s fifth largest beverage company Wahaha.
The predominance of exports in the economy has led Zhejiang’s enterprises to open branches all over the world, and today more than 400 Zhejiang compa- nies run their business in foreign countries.
The province, however, is now feeling the pinch of the international crisis and is grappling with China’s middle income trap, as the country’s low-price edge over manufactured goods is being eroded by rising wages and raw material prices. The provincial government has conducted several studies to identify problems in and risks to local economy.
The results of those studies have led the State Council to launch four incentive programs in the province’s four main economic sectors. They comprise development of the maritime economy, new planning for the Zhoushan Archipelago, reform of the international trade sector in Yiwu – reputed small commodities distribution hub – and a reshuffle of the banking sector in Wenzhou. Of these moves the last, also the latest, move is under closest scrutiny, as it is intended as a trial run for future national reform. This program aims to diversify the financial market by soliciting private capital and improve its risk prevention and resistance abilities.
The Imperative of Change
The port city of Wenzhou lies on the banks of the Oujiang River close to where it flows into the East China Sea. Today, Wenzhou is the third largest and most populated city in the province. It has long had an important economic role, giving Zhejiang’s mountainous interior access to the sea, and its people are known for their entrepreneurship and resilience.
As such, since the late 1970s the city has led China’s drive to nurture a market economy, fostering a strong private sector and amassing huge reserves of wealth. Today, Wenzhou is home to a large number of small and medium-sized enterprises, who are active in industries such as garments, footwear, domestic appliances, automobiles, motorcycle spare parts and wind power equipment.
The lion’s share of Wenzhou products head for foreign markets. Responsible for its remarkable economic growth, this broad exposure to the world, however, also means Wenzhou is highly susceptible to the ups and downs of the global market.
The city felt shockwaves from the financial crisis immediately after it first emerged in the U.S. in 2008. International orders plummeted, profit margins shrank, and rising wage and material costs at home made the situation even worse for local manufacturers. The liquidity chain was strained and eventually snapped.
In the past few years small and medium-sized enterprises in the city struggled to find funding, as banks favor bigger state-owned companies. As the government banking system failed to meet the demand for capital of local private businesses, many turned to the abundance of private money in the city. Informal deals were struck without any transparency and out of the protection of the law. Interest rates were set arbitrarily and were often unsustainably hefty.
All these financial woes culminated in 2011, resulting in what has become known as the private lending crisis. It caused several business owners to commit suicide and dozens to flee the city, unable to pay back the exorbitant interest on loans from loan sharks.
It was under these conditions that the Zhejiang provincial government embarked on a mission to bring private lending into the public sunshine and that the State Council decided to introduce sweeping reforms to Wenzhou’s financial sector as a pilot for the nation.
Funding for Smaller Companies
In order to shore up financial backing for medium-sized and small companies, several small banking institutions have been created to attract small private savings. The start-up funds needed to create these new small banks were raised among local companies and the small banks are currently monitored by local and provincial governments and the People’s Bank of China.
Several of the new small banks and financial service institutions are located in Wenzhou. They include the Wenzhou Private Lending Service Center, which was approved by the municipal government in November 2011 and opened in April this year. With registered capital totaling RMB 6 million, it was set up by the Lucheng District Association of Industry and Commerce.
The association is essentially a loan agency that collects information on potential lenders and borrowers and provides relevant services, such as risk assessment and credit evaluation, to facilitate deals between the two parties. This marked the first such effort in Wenzhou, and the center has recently introduced more financial services, including automobile purchase mortgage.
The Wenzhou Private Lending Service Center has also paired up with Zhejiang University to provide risk prevention for private lending. Since it opened to the public and handed over its first loan of RMB 50,000 to a young electronic products dealer, the center has steadily increased its registered clients and loans. In the first four months of operation it dealt with 1,197 loan offers worth nearly RMB 930 million, and helped clinch 219 deals worth RMB 126.29 million. Its monthly interest rate averages a modest 1.4 percent, and so far all loan repayments have been received.
Besides soliciting and lending loans, the center also offers notarization, accounting, assets evaluation and legal services. As the whole process of lending and borrowing is utterly transparent and well regulated, with meticulous records being taken, the center is an effective tool in preventing usury and acts as an integrated banking service not only to help raise private funds, but also to spread knowledge about finance and standardized financial practices.
Creating New Banks
Another facet of the financial reform in Wenzhou is the establishment of new financial institutions such as shareholding township and village banks and rural financing cooperatives. Yueqing, a small town 40 km northeast of Wenzhou, has experienced some of the most dramatic developments in recent years. It sits on the region’s industrial belt and its harbor serves the whole area. Its booming private economy had long been fighting to find financing and now has better access thanks to the creation of new banks like Yueqing United Rural Bank Co., Ltd., located in its business center.
Yueqing United Rural Bank Co., Ltd was founded in May 2010 with investment from Hangzhou United Bank and 13 other private enterprises. It is a bank particularly serving agriculture and rural areas and targeting micro and small businesses and the self-employed. So far it has provided RMB 3.4 billion in 5,400 loans.
This bank quickly drew in local customers with its lower threshold of loans, simpler application process and high efficiency. These features won it a place among the nation’s top 10 rural banks.
Clients still flock to the bank and demand for its services is running high, but its collateral is small and the returns are low. Many big banks are moving away from rural loans for this very reason, which is what prompted the State Council and Zhejiang provincial government to search for new forms of financing organizations and services.
About 35 km south of Wenzhou is the city of Rui’an. This city has a strong industrial base, anchored on the manufacture of home appliances and motor parts. It is home to a large pool of wealthy businesses who sit on a large reserve of capital. This coveted financing resource is now being tapped into thanks to Huafeng Group, a private conglomerate engaged in sectors ranging from chemistry, harbor and new energy to processing, which established the Rui’an Huafeng Micro Credit Co., Ltd. in 2008.
The company offers loans to smaller businesses in the aquaculture and fish processing industry, machinery manufacturing, footwear, apparel, packaging, construction and automobile parts production. These loans, ranging from one to 12 months, are generally not provided by normal banks. The company also provides accountancy services to their clients, helping them to improve the way they run their business.
These are just some of the recent developments in Wenzhou’s banking sector. In the coming years they will be closely monitored and guided by the provincial government, and, if successful, the practices hammered out here might be extended to the insurance sector and eventually to the entire country.
Zhejiang has a booming export-oriented economy and one of the biggest private sectors in China, which produces 70 percent of its GDP. Among its cohort of private brands are such heavyweights as e-commerce giant Alibaba and China’s largest and the world’s fifth largest beverage company Wahaha.
The predominance of exports in the economy has led Zhejiang’s enterprises to open branches all over the world, and today more than 400 Zhejiang compa- nies run their business in foreign countries.
The province, however, is now feeling the pinch of the international crisis and is grappling with China’s middle income trap, as the country’s low-price edge over manufactured goods is being eroded by rising wages and raw material prices. The provincial government has conducted several studies to identify problems in and risks to local economy.
The results of those studies have led the State Council to launch four incentive programs in the province’s four main economic sectors. They comprise development of the maritime economy, new planning for the Zhoushan Archipelago, reform of the international trade sector in Yiwu – reputed small commodities distribution hub – and a reshuffle of the banking sector in Wenzhou. Of these moves the last, also the latest, move is under closest scrutiny, as it is intended as a trial run for future national reform. This program aims to diversify the financial market by soliciting private capital and improve its risk prevention and resistance abilities.
The Imperative of Change
The port city of Wenzhou lies on the banks of the Oujiang River close to where it flows into the East China Sea. Today, Wenzhou is the third largest and most populated city in the province. It has long had an important economic role, giving Zhejiang’s mountainous interior access to the sea, and its people are known for their entrepreneurship and resilience.
As such, since the late 1970s the city has led China’s drive to nurture a market economy, fostering a strong private sector and amassing huge reserves of wealth. Today, Wenzhou is home to a large number of small and medium-sized enterprises, who are active in industries such as garments, footwear, domestic appliances, automobiles, motorcycle spare parts and wind power equipment.
The lion’s share of Wenzhou products head for foreign markets. Responsible for its remarkable economic growth, this broad exposure to the world, however, also means Wenzhou is highly susceptible to the ups and downs of the global market.
The city felt shockwaves from the financial crisis immediately after it first emerged in the U.S. in 2008. International orders plummeted, profit margins shrank, and rising wage and material costs at home made the situation even worse for local manufacturers. The liquidity chain was strained and eventually snapped.
In the past few years small and medium-sized enterprises in the city struggled to find funding, as banks favor bigger state-owned companies. As the government banking system failed to meet the demand for capital of local private businesses, many turned to the abundance of private money in the city. Informal deals were struck without any transparency and out of the protection of the law. Interest rates were set arbitrarily and were often unsustainably hefty.
All these financial woes culminated in 2011, resulting in what has become known as the private lending crisis. It caused several business owners to commit suicide and dozens to flee the city, unable to pay back the exorbitant interest on loans from loan sharks.
It was under these conditions that the Zhejiang provincial government embarked on a mission to bring private lending into the public sunshine and that the State Council decided to introduce sweeping reforms to Wenzhou’s financial sector as a pilot for the nation.
Funding for Smaller Companies
In order to shore up financial backing for medium-sized and small companies, several small banking institutions have been created to attract small private savings. The start-up funds needed to create these new small banks were raised among local companies and the small banks are currently monitored by local and provincial governments and the People’s Bank of China.
Several of the new small banks and financial service institutions are located in Wenzhou. They include the Wenzhou Private Lending Service Center, which was approved by the municipal government in November 2011 and opened in April this year. With registered capital totaling RMB 6 million, it was set up by the Lucheng District Association of Industry and Commerce.
The association is essentially a loan agency that collects information on potential lenders and borrowers and provides relevant services, such as risk assessment and credit evaluation, to facilitate deals between the two parties. This marked the first such effort in Wenzhou, and the center has recently introduced more financial services, including automobile purchase mortgage.
The Wenzhou Private Lending Service Center has also paired up with Zhejiang University to provide risk prevention for private lending. Since it opened to the public and handed over its first loan of RMB 50,000 to a young electronic products dealer, the center has steadily increased its registered clients and loans. In the first four months of operation it dealt with 1,197 loan offers worth nearly RMB 930 million, and helped clinch 219 deals worth RMB 126.29 million. Its monthly interest rate averages a modest 1.4 percent, and so far all loan repayments have been received.
Besides soliciting and lending loans, the center also offers notarization, accounting, assets evaluation and legal services. As the whole process of lending and borrowing is utterly transparent and well regulated, with meticulous records being taken, the center is an effective tool in preventing usury and acts as an integrated banking service not only to help raise private funds, but also to spread knowledge about finance and standardized financial practices.
Creating New Banks
Another facet of the financial reform in Wenzhou is the establishment of new financial institutions such as shareholding township and village banks and rural financing cooperatives. Yueqing, a small town 40 km northeast of Wenzhou, has experienced some of the most dramatic developments in recent years. It sits on the region’s industrial belt and its harbor serves the whole area. Its booming private economy had long been fighting to find financing and now has better access thanks to the creation of new banks like Yueqing United Rural Bank Co., Ltd., located in its business center.
Yueqing United Rural Bank Co., Ltd was founded in May 2010 with investment from Hangzhou United Bank and 13 other private enterprises. It is a bank particularly serving agriculture and rural areas and targeting micro and small businesses and the self-employed. So far it has provided RMB 3.4 billion in 5,400 loans.
This bank quickly drew in local customers with its lower threshold of loans, simpler application process and high efficiency. These features won it a place among the nation’s top 10 rural banks.
Clients still flock to the bank and demand for its services is running high, but its collateral is small and the returns are low. Many big banks are moving away from rural loans for this very reason, which is what prompted the State Council and Zhejiang provincial government to search for new forms of financing organizations and services.
About 35 km south of Wenzhou is the city of Rui’an. This city has a strong industrial base, anchored on the manufacture of home appliances and motor parts. It is home to a large pool of wealthy businesses who sit on a large reserve of capital. This coveted financing resource is now being tapped into thanks to Huafeng Group, a private conglomerate engaged in sectors ranging from chemistry, harbor and new energy to processing, which established the Rui’an Huafeng Micro Credit Co., Ltd. in 2008.
The company offers loans to smaller businesses in the aquaculture and fish processing industry, machinery manufacturing, footwear, apparel, packaging, construction and automobile parts production. These loans, ranging from one to 12 months, are generally not provided by normal banks. The company also provides accountancy services to their clients, helping them to improve the way they run their business.
These are just some of the recent developments in Wenzhou’s banking sector. In the coming years they will be closely monitored and guided by the provincial government, and, if successful, the practices hammered out here might be extended to the insurance sector and eventually to the entire country.