China tests financial reforms in Wenzhou

China’s State Council moved to legalize private lending in Wenzhou, Zhejiang province, in what may be the beginnings of an effort to liberalize the state-controlled financial system, The Wall Street Journal reported. China’s cabinet said it would allow private lenders in the city to operate as investment companies in order to continue lending to small and medium enterprises. SMEs have long complained that China’s state-owned banks prefer to lend to state-owned enterprises, due to their implicit government backing. The State Council also said that Wenzhou residents may be able to invest as much as US$3 million a person or a total of US$200 million a year to set up, acquire or invest in nonfinancial companies overseas, a practice that is now strictly limited. A senior executive at a large Chinese bank said these approvals are “very significant,” given that China’s banks are “ill-equipped to lend to SMEs.” It remains to be seen whether financial liberalization will reach other parts of China.