By staff reporters Wang Peicheng and Yang Zhongxu

Upon arriving in Beijing at 11:57 a.m. on March 28, Zhang Zhenyu, director of Wenzhou's Financial Affairs Office, posted a photo of the Capital Airport Freeway on Weibo, a popular Twitter-like microblogging service in China. Zhang commented, “It is a sunny day in Beijing today, perhaps this means that spring is coming for Wenzhou's financial reform.”

Later that day, Chinese Premier Wen Jiabao chaired a State Council executive meeting in which the State Council decided to make the city of Wenzhou a pilot region for comprehensive financial reform. Among the twelve tasks put forward in the plan, the first is to “standardize and develop private finance,” indicating that the central government officially recognizes private finance which has up to now been somewhat of a gray area.

Many argue the pilot program was implemented as a result of the private lending crisis that erupted in Wenzhou six months ago and caught nationwide attention. (See Credit Crunch in Wenzhou, the cover story of the 2011 24th issue of Caijing, and Saving Small- and Medium-sized Enterprises, the cover story of the 2011 25th issue.)

Ba Shusong, deputy director of the Financial Research Institute, Development Research Center of the State Council, and chief economist of the China Banking Association, stated that there are two ways to avert financial risks: one is to remedy the situation after-the-fact; the other is to reform. “The [private lending] crisis in Wenzhou made it easier for people to reach a consensus on the need to reform.”

During an inspection visit to Fujian and Guangxi Provinces from April 1-3, Premier Wen Jiabao said that allowing private capital into the financial sector is about breaking up the monopoly enjoyed by state-run financial institutions. The central government has already reached a consensus on this issue.

Meanwhile, the second task put forward in the pilot plan is to allow private capital to participate in the reform of local financial institutions, launching or holding shares in new types of financial organizations including rural banks, finance companies, and rural fund cooperatives according to the law. Qualified microfinance companies can also be restructured into rural banks according to the plan. This indicates that policymakers not only recognize private finance, but also permit private lenders to operate as legitimate financial institutions.

In practice, many uncertainties still exist in encouraging state-owned and joint-stock banks to lend to small and micro companies and in establishing a local regulatory system. State-owned banks, private financial institutions, and regulatory officials have failed to reach a consensus.

Caijing learned that the State Council plans to immediately halt the Wenzhou pilot program if success isn't achieved within six months to a year; on the other hand, if the program is successful, certain reform areas may be rapidly replicated in other cities.

A former central bank insider familiar with the history of China's financial reform said that even though the Wenzhou pilot program does not have much real significance, it does mark the beginning of a new round of reforms that could potentially achieve much more. Future measures could include liberalizing interest rates and allowing private enterprises or natural persons become shareholders of finance companies. Given the monopoly in China's financial sector, the program could be considered a big success if more competitive non-bank financial institutions are fostered, even if it does not touch upon the marketization of interest rates.