Major financial reforms begin in China

A plan to allow Wenzhou residents to invest overseas is back on track. (See: Wenzhou overseas investment plan stopped for background.) Additionally, the residents will be allowed to create private loan companies in a sign of major financial sector reforms. This is the first "fallout" of the Bo Xilai firing—reform is back on track. China Daily has coverage in Wenzhou to pilot reforms
Wenzhou won Beijing's approval on Wednesday for a landmark financial pilot project that will allow residents of the coastal city to, among other things, invest privately overseas and set up loan companies.

At a State Council executive meeting chaired by Premier Wen Jiabao, the government selected Wenzhou in eastern Zhejiang province, a city with a deep tradition of entrepreneurship, to be a "pilot zone" for a series of financial reforms.

The decision was hailed as a "milestone" by Wang Jianhui, chief economist with Southwest Securities, as it showed the government's determination to lead "the reforms that are urgently needed".

Owners of private businesses welcomed the move. "I see a lot of new investment opportunities coming up," said Zhu Jianfeng, general manager of Gold Emperor Group, a Wenzhou-based shoemaker. "We will wait for the full details to emerge and then see what we can really do."

The State Council decision covered 12 major points, which include developing privately owned financial services, setting up village banks and rural financial co-ops and encouraging lending by State-owned banks to smaller businesses.

The government of Zhejiang province was required by the State Council to set up a working group to lead the implementation of the reform program and to work closely with the People's Bank of China.
This last bit is important. The People's Bank of China was a source of reform until about 2005, when reform stopped dead in its tracks and the Ministry of Finance reasserted its power. Previous reform attempts have been stopped, but this one seems likely to continue because the reformers just won a major political victory.

The Wall Street Journal also covers the news in China Tests Financial Relaxation in Wenzhou and goes into political details.
There was no indication from the State Council statement that the government was yet ready to move on interest-rate liberalization, even though central-bank Gov. Zhou Xiaochuan said recently that the time was "basically ripe" for such a move. The People's Bank of China reports to the State Council.

Early last year, the Wenzhou government proposed to give its locals more freedom to invest overseas, only to suspend the move due to a lack of consent by the central government. Wenzhou officials then worked out a new proposal—similar to the original one—and submitted it for approval as part of the broader plan to make the city a testing ground for financial reforms.

While it appeared that the government has now sided with Wenzhou, the State Council statement didn't give unambiguous approval, and it's unclear how much freedom the government is ultimately willing to give Wenzhou residents to invest overseas.

Chinese officials are buffeted by crosswinds. On the one hand, some in the State Council worry about large capital outflows as the economy slows. On the other hand, the central bank is continuing its drive to encourage Chinese businesses to invest overseas as part of its effort to diversify its $3.2 trillion worth of foreign-exchange reserves, by far the world's largest.

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