BEIJNG, April 5 (Xinhua) -- Private capital is encouraged to play a bigger role in the development of Wenzhou after China has approved plans to set up a pilot zone in the coastal city to conduct financial reform.

At a State Council executive meeting presided by Premier Wen Jiabao on March 28, 2012, the government selected Wenzhou, a city known as the nation's private financing hub, to be a pilot zone for a series of financial reforms.

Located in east China's Zhejiang Province, Wenzhou has a highly developed private economy with thousands of private enterprises and abundant private capital. The lack of investment channel for private capital in the city has resulted in a dramatic increase in high-interest-rate underground private lending. But as the city recently experienced economic devastation and a collapse of its private loan network, the city is now faced with the aftermath of financial woes.

Effectively sorting out Wenzhou's problems and making financing serve the real economy are not only important for the healthy development of Wenzhou, but also of great pioneering significance for financial reform and economic development throughout the nation, according to a statement released after the meeting.

It was decided at the meeting that the reform program will cover 12 major tasks, which includes regulating and developing private financing, encouraging individual funds to set up rural banks or small lending companies, supporting lending by state-owned banks to smaller businesses and allowing individual investors to make direct overseas investment.

The pilot program will "set free the power of Wenzhou's private capital," said Zhou Dewen, chairman of Wenzhou SME Development Association. "What we will see will be a new growth cycle of non-State sector investment and financial services."

Highlights of the Reform
Among the package of proposed reforms, the establishment of rural banks by eligible micro-finance companies and experiment of allowing Wenzhou's residents to make direct investment overseas have received the biggest applause.

Guo Tianyong, a professor of the Central University of Finance, said allowing eligible micro-finance companies to be transformed into rural banks is a major breakthrough in this financial reform. It breaks the bottleneck of private capital into the banking industry.

Local businessmen cheered the proposal as a possible end to the state banks' monopoly in the lending market.

Ye Tan, an independent financial commentator, said the direct effect of letting citizens invest directly overseas is to reduce pressure on China's foreign exchange reserves and open a road of Chinese manufacturing upgrading and restructuring for overseas acquisitions. Ye has also warned about the financial risk controls. Capital outflows might be bigger than expected because although the test direct offshore investment project has been launched in Wenzhou, it might attract capital nationwide.

New Financial Experiments Underway
Wenzhou Civil Financing Registration Center is in its final renovation work. After its opening in April, the center will provide a full range of services, from notarization and auditing, to legal advice and bank transactions.

"There is a fine line between civil financing and illegal financing. We can provide more transparent and standardized financial services. This can prevent illegal financing practices," said Xu Zhiqian, person in charge of the center.

The registration center is the first of its kind in Wenzhou. It was co-founded by 22 private enterprises with a registered capital of 6 million yuan (about 952, 380 U.S. dollars). The center will operate in corporate form under the guidance of the local government. Xu said they have been exploring new ways to make the experiment a success.

Xintong Folk Capital, the city's first private capital management has been running on a trial basis for over a month. It has conducted several projects already, with all its capital flow under government supervision.

“Xintong is a test case for legalizing and regulating private lending supported by the government. People who have the money and wanted to invest can come to us, and people who have good projects but lack the fund can come to us too,” said Huang Yongping, manager of Xintong Folk Capital.

Wenzhou saw one-fifth of its 360,000 small and medium-sized businesses stop operating due to cash shortages last year.

Serving as a link between cash-rich investors and cash-starved small and medium-sized businesses, the company has a registered capital of 100 million yuan, and is allowed to collect as much as 400-million yuan from investors and channel them into profitable projects.

But experts are saying there’s still more to be done to regulate private financing other than setting up financial institutions. “Legalizing private financing is a must, and further more, the government should set up an administration specialized to manage SMEs nationwide under the state council, to better allocate resources as a whole,” said Zhou Dewen.