Small Lenders in Wenzhou Rush to Become Banks
The central government’s pledge to let private lenders become village and town banks as part of an economic experimental zone to be established in the city of Wenzhou in prosperous Zhejiang province has triggered a rush into the lending business by local listed firms.
Most Chinese entrepreneurs consider the banking business to be potentially highly lucrative. But the small private loan companies that the central government began allowing in 2005 on a trial basis in a few provinces have proven to be mostly unprofitable. The profit potential for such small lenders is severely limited. Their ability to raise capital is limited because they are prohibited from accepting savings deposits. Another severe limitation is the restriction against lending more than 50% of their net fixed assets. They aren’t even allowed to seek financing from more than two banks. But now that such lenders will soon be allowed to act as banks, the loan business has suddenly become a lucrative business opportunity.
In October 2005 the central government began pilot programs in Shanxi, Shaanxi, Guizhou, Sichuan and Inner Mongolia to let local businesses establish small loan companies to provide financing services for farmers in hopes of bolstering the agricultural financing system. It wasn’t until 2009 that Zhejiang province was included in the program. That was when Wenzhou first saw the opening of eight small loan companies, twice as many as the other cities in the province.
They have struggled to turn a profit. But now Wenshou’s publicly-traded conglomerates like the Semir Group and Huafon Group have established small loan companies. Shoemaker Aokang and Cheng Yi Pharmaceutical, which are awaiting approval for an initial public share offering, have also established their own small loan companies.
But real estate developer Xinhu Zhongbao failed to get approval for its small loan business despite having registered the business with 200 million yuan ($32 million) in capital. Newspapers have speculated that the rejection may be due to Xinhua Zhongbao’s existing ownership of an 8% stake in Shengjing Bank, Chendu Rural Commercial Bank and a 1.52% stake in Bank of Jilin. It also owns a futures company and is a shareholder of Xiangcai Securities and Great Wall Securities.
But Xinhua Zhongbao owner Huang Wei has seen shares of his Harbin High Tech Group jump over 20% in the last four trading days because the company is a major stakeholder in Bank of Wenzhou.