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China to legalize private lending

(Xinhua)
Updated: 2009-03-04 23:21

China's private lending market is estimated at about 2 trillion yuan ($292 billion) a year, and it's often the only source of credit in rural areas, but its growth has been constrained by its underground status.

However, private lending might soon occupy a more legitimate place in the country's capital markets, analysts said, with the People's Bank of China (PBOC) having decided to grant it legal status.

Workers check jewellery and watches at the Oriental Pawn shop in Shanghai February 9, 2009. Turned away by banks caught in the credit crunch, many Chinese entrepreneurs are borrowing from pawn shops instead. [Agencies]

In a statement on its website posted February 20, the PBOC - the central bank - said it would formulate regulations on private lenders and develop the sector into "a significant player" in the country's rural money markets. It hasn't said when the new regulations would take effect.

Zheng Fengtian, vice dean with the Agriculture and Country Department of Renmin University of China, said the move was "absolutely necessary," since the economic slowdown would aggravate the perennial problem of capital shortages in rural areas and harm employment and agriculture.

TOUGH RURAL TIMES

Related readings:  China urged to revamp rating, credit guarantee systems  Private lending can open up credit market  Private financing benefits  China businesses turn to pawn shops as loans dry up

The government has warned that this year would be "the toughest" since the turn of the century, with the global downturn having cost about 20 million rural migrant workers their jobs.

The government has urged laid-off workers to become entrepreneurs, but without access to funds, it would be tough to start a business, said Zheng.

China's countryside has had chronic capital shortages since an industry reshuffle in the late 1990s forced most state banks to withdraw from rural areas, leaving behind only the Agricultural Bank of China, rural credit cooperatives and postal savings banks.

These institutions haven't filled the void, however, with many limiting lending for fear of bad debt and low profits. Returns from rural lending are low, while risks are high. Some institutions even forbid rural outlets from lending without higher-level approval.

As a result, said analysts, most of the savings that rural residents put into financial institutions have been used to finance production and business in much wealthier cities. The analysts said that the demand for rural credit now being satisfied by the underground market is equal to about 10 percent of China's total personal savings deposits.

"To some extent, they [local financial institutions] act like water pumps, exhausting local financial resources," said Zheng.

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