There are a lot of underground borrowing and lending in China, as smaller companies have long complained they have starved for funds because China's giant state-owned banks favor other state-owned enterprises, whose ability to repay is considered guaranteed by the cash-rich Chinese government. Recently, China approved a broad package of financial reforms in Wenzhou, a city known for entrepreneurship and underground lending, in what may be a prelude to a national effort to liberalize China's creaking financial system.
The move by the State Council, China's cabinet, represents an important symbolic step toward overhauling a system long seen as a barrier to developing a more substantial and sustainable growth model for the world's second-largest economy. The key test will be whether the Wenzhou reforms are rolled out in other parts of the country. Other promised reform efforts in recent years have failed to materialize, and the government's tendency toward overregulation could squelch innovation and keep its important but shadowy informal lending system underground. It is unclear how big China's underground lending might be. In October UBS estimated it could be between two trillion yuan and four trillion yuan in total, or $316 billion to $632 billion. The process of legitimizing informal finance could involve giving existing underground lenders a license to operate as small-loan companies while imposing deposit collection requirements, experts say.
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