First private lending regulation submitted

The first draft regulation for private lending in Wenzhou has been submitted to the Zhejiang provincial government, Shanghai Securities News reported Wednesday.

It marks major progress for the financial reform program in the city and the effort to legalize underground financial activities, the report said.

Efforts to regulate private lending have long been a priority for Wenzhou. The city is home to 300,000 small and medium-sized enterprises (SMEs) and has seen extensive local private lending activities. The new draft will be China's first regulation for private lending, if it is passed.

According to the draft, if an individual borrows more than 2 million yuan ($322,580) in a single private deal, or an SME borrows over 5 million yuan in a single private loan, they must register with a private lending public service organization, or they could receive a fine.

Any private lending of over 1 million yuan involving more than five lenders must also be registered, according to the new rule.

The regulation is aimed at distinguishing between private lending for legal purposes - such as personal consumption and production - and illegal fundraising, which often turns out to involve financial fraud, according to the Zhejiang Financial Office, which drafted the regulation.

Through this regulation, the local authorities hope that individuals and SMEs that have difficulty in obtaining loans from traditional financial institutions will be able to get funding from legitimate private sources. It should also make it easier for the regulator to control financial risks.

Wenzhou has seen numerous problems with private lending in recent years, following the global financial crisis and the loosening of China's monetary policy.

Low interest rates encouraged individuals to pursue higher returns by lending to SMEs but criminals also lured investors with the promise of high returns, amid an underground lending market that was not supervised.