In the most sweltering month of the year in Zhejiang province, Fang Peilin rushes around for business like a cat on hot tin roof.

As the president of a small guarantee company in Wenzhou - which like many so-called guarantee firms in this East China province acts in fact as an illegitimate private lender - he travels between a local banking regulator and a financial affairs office every day, asking about news about microcredit companies that will reportedly be allowed to set up.

Many companies are aspiring to become among the first microcredit firms in China, says Fang, who owns the company called Fangxing. "For enterprises like us, the best way is to seek a place in the first batch, because future policies might become more stringent regarding illegitimate private lending."

Microcredit firms, or legal private lenders, are a hot topic in town. Although an official timetable has yet to be released, it has been widely reported that microcredit companies will receive a green light and the first group of such lawful private lenders could start issuing loans as soon as September.

China Banking Regulatory Commission says these private firms could lend at interest rates not higher than an upper limit that has yet to be announced, and underground lending will become standardized and regulated.

Underground financing channels, which fill the vacuum created by banks which are less enthusiastic about lending to small and medium-sized enterprises (SMEs), are flourishing in the province.

Although many believe they pose threats like counterfeiters and smugglers because they skew the official interest rate and siphon off deposits from banks, they also provide benefits by lending to the numerous SMEs.

It's estimated that there is a 600 billion yuan liquidity fund from Wenzhou that is active across the country. Figures from Wenzhou financial affairs office show that more than 300 billion yuan was available as private lending capital last year in Wenzhou alone and it is growing by 14 percent every year.

Much of this capital is owned by the so-called "guarantee companies". Since the first guarantee firm debuted in Wenzhou in 2001, about 240 such registered companies have opened in the city.

In a broader picture, underground lending totaled 1.98 trillion yuan last year in China, or 28 percent of the amount banks loaned, according to a survey by Beijing's Central University of Finance and Economics.

The illegitimate lenders eased the financing difficulties for the fund-thirsty SMEs, especially at a time when tightened monetary policies are drying up banks loans. But the price is much higher interest rates.

Since last year, China's benchmark interest rate has risen six times. The banks reserve requirement ratio - the deposit percentage required by the Central Bank - has also been raised 15 times in the same period.

"Under such circumstances, it's almost a dream to have bank financing, although you have to have properties or other valuables as collateral," says private entrepreneur Li Zhicheng.

An official with the Industrial and Commercial Bank of China's Yiwu sub-branch says the lending to SMEs and individuals has been cut enormously owing to the tightened policies. "Between January and February of 2007, 70 percent of our credit went to SMEs. But this year, the percentage is less than 15 percent in the first two months."

But because the setup of the first batch of legal private lenders is around the corner, many private lending business owners are worried about their fate if they are not included in the first batch, as only a limited number of firms will be allowed under the pilot plan.

Sources say that every county in Zhejiang will have one to two microcredit companies, with only a few exceptions.

Take Wenzhou, which has 11 counties or townships, as an example. It has only 11 quotas for legal private lenders in the trial period. But the numerous private lender advertisements in local newspapers are only a fraction of the total number of private lenders.

Because of its large liquidity, Wenzhou, along with Hangzhou, Jiaxing and Taizhou will reportedly be allowed to have five more microcredit companies each. But underground lenders still feel the quotas are insufficient.

Wenzhou Small and Medium Enterprises Development Institution head Zhou Dewen describes the situation as too many monks vying for limited gruel.

"Too many Zhejiang businessmen want to make the first attempt," he says. "In addition to those companies aiming to become legitimate lenders, many other private firms dream of jumping on the bandwagon as well."

What's more, to screen out small lenders, microcredit firms will be chosen from private enterprises whose net assets are no lower than 50 million yuan, who have a asset-liability ratio of less than 70 percent and who have been profitable for three years in a row, with a revenue higher than 15 million yuan.

Other requirements include that the largest shareholder is not allowed to possess more than a 20 percent stake while other shareholders should take between 0.5 to 10 percent of the stake each. Bank loans and publicly collected funds are not allowed to be used to set up microcredit firms.

In Wenzhou, the threshold is even higher. The registered capital in five of its counties is required to be 200 million yuan while in other places 100 million yuan will do.

"We aspire to become a legitimate private lender," says Guo Zhichao, president of Wenzhou Zhongtou Investment Guarantee Co Ltd. "We have been preparing since May."

But given the required colossal registered capital, Guo says: "We can only team up with other small companies; otherwise we won't have enough capital."

(China Daily July 28, 2008)