Ji Ming, governor of the Wenzhou City Branch of the People's Bank of China, the country's central bank, said the reform involved the introduction of a small loan system, floating interest rates, and lifting the ban on private sector investment in commercial banks in urban areas.

The reform, the first of its kind on the Chinese mainland, was designed as an experiment to explore ways to enable the local banking sector to provide much-needed loans for the capital-hungry private economy in Wenzhou, Ji said.

The prosperous private economy accounted for 96.7 percent of the city's total industrial output in 2001, which stood at 203 billion yuan (24.7 billion US dollars).

Insiders say the move comes amid growing calls for the country's State-dominated banking sector to promote structural and business reforms in a bid to reduce financial risks, and improve their services and competitiveness.

Under the reform initiative unveiled Thursday, a system will becreated in the city's banking sector for small loans, or loans below half a million yuan (60,975 US dollars), that links the income of the credit manager with the yields of the loan.

In other words, the manager earns more if the loan carries a higher interest rate, while shouldering responsibility for the business risk.

The governor said the reform initiative stressed loan yields and capital management to measure the performance of a bank and loan managers, a drastic change from current practice that used the amount of bank deposits and share of the market to assess their performance.

At rural credit unions in rural parts of the city, the dominant credit institutions backed by the State banks, interest rates for individual or corporate deposits may increase by as much as 50 percent, while interest rates on loans may rise by up to 100 percent or drop by up to 10 percent, said the governor.

China's State-owned banks have closed thousands of their branches in rural areas in recent years, and the central bank has since encouraged rural credit unions to fill the vacuum left by their closure.

Private capital will be allowed to invest in commercial banks based in Wenzhou, and the State-owned shares in the banks will be reduced to about 10 percent from the current 34 percent, according to the initiative.

United rural credit unions in prosperous Ruian and Leqing cities in Wenzhou will be opened to private capital and transformed into share-holding commercial banks.

An investment company for medium-sized and small firms will be set up in Wenzhou.

Under the initiative, a leading firm in a sector will serve as the sponsor for the investment company, and private, local government and State banks may also invest.

Commercial banks in the city will be allowed to offer loans under commission to wealthy individuals.

A field investigation last August by Dai Xianglong, then governor of the central bank, prompted the central bank to give the green light to the proposed reform at the end of the last year, sources in Wenzhou said.

Dai praised the dynamic private economy and healthy financial and banking sector during the tour of investigation.

The non-performing assets of financial institutions in Wenzhou are less than 5 percent, far lower than at the country's State-owned banks.

Wenzhou is home to 56,000 private medium-sized and small enterprises and 208,000 family businesses, which have been troubled by a lack of capital during the past.

Governor Ji explained that many medium-sized and small firms had little to offer as mortgages when applying for bank loans, which made it difficult for them to gain bank loans.

Providing services to medium-sized and small private companies and farmers remained an untapped area for the country's State-owned banks, said the governor.

The financial and banking reform will open up new business channels for the State-owned banks and financial institutions, and make it easier for private companies to have access to bank loans and other services while improving the vitality of State-owned banks.

The central bank plans to introduce floating interest rates on a trial basis for rural credit unions across the country later this year.

(Xinhua News Agency February 21, 2003)