PBOC report makes suggestions on private financing

China's central bank highlighted the role and risks of non-governmental financing channels in its supplement issued yesterday.

The report, focusing on regional financial operation, recognizes that the private financing market is brisk since 2004 due to various reasons.

A random survey finds fund raising through this channel has reached 55 billion, 45 billion, and 35 billion yuan in Zhejiang, Fujian and Hebei provinces last year. That is equivalent with 15 percent to 25 percent of the local added loans the same year.

The central bank has observed the benefits of the private financing as it helps to optimize the financing structure by balancing the direct financing and indirect financing. It serves as a new financial source to power the small and medium sized private enterprises and local economy at county level. For banks, it transfers and diversifies credit risks which may be brought about by private SMEs.

However, the central bank's report also warns risks in private financing. Immune from local industrial policy reflecting the national macro-control strategy, private capital is very likely to be trapped in temptations of lucrative sectors for which a slowdown is thought to be necessary by the government. Private investors do not depend on sufficient and timely information. This adds to the possibility of bad decisions. The government's efforts on adjusting the economy will thus be undermined.

What's more, stability of local financial system will also be imperiled once disputes erupt as private financing generally involve many participants but irregular operation which make supervision very difficult.

Given this, the central bank's report suggests that laws clarify definition of illicit absorption of private deposits and private borrowing. The first step, it says, is to have private financial activities registered and regulated.

The report also highlights the importance of innovation on financing system and expanding investment opportunities for private capital. It asks for favorable conditions to facilitate private investment by more credit loan to private SMEs and counties and removing irrational restrictions keeping private capital off.

It also calls on supervision over the private financing. A monitoring and reporting system is proposed as a part of the solution to a long-term effective management mechanism.

By People's Daily Online