China may loosen overseas investment rules for private investors, the country’s central bank chief said Tuesday, less than a week after the government approved a trial of financial overhauls in Wenzhou.
The State Council, or cabinet, said last week that it would study allowing direct investments overseas by residents in the city of Wenzhou as part of a "general financial reform zone" experiment.
Speaking at the 2012 Boao Forum for Asia on Hainan Island, Zhou Xiaochuan, the central bank governor, said China encouraged capital outflows, which would help reduce imbalances caused by net capital inflows.
Zhou also warned that the global economy could slip back into recession, and reiterated that China would use a combination of monetary tools to tackle inflation and steer toward a soft landing.
The Chinese central bank is easing policy as the nation, with the world’s second-largest economy after that of the United States, encounters challenges, but it has stuck to a gradual approach because of concerns over inflation and property risks.
Annual economic growth is widely expected to slow to little more than 8% in the first quarter of 2012 -- the fifth consecutive quarter of slowed expansion -- while annual inflation cooled to a 20-month low of 3.2% in February.
Wenzhou, in Zhejiang Province, is known throughout China as a hub for private entrepreneurship and "gray market" lending.
Many private businesses turn to such loans because they lack the connections to gain access to money at official rates.
Allowing private investors to lend through legal entities will help the government tame the country’s underground lending market, where annualized interest rates can reach 100 percent.
The idea of a financial overhaul zone emerged in late 2011 after news media reports about Wenzhou entrepreneurs who had gone into hiding or had committed suicide after they were unable to repay high interest under-the-counter loans.
The People’s Bank of China estimated that market at 2.4 trillion renminbi, or $381 billion U.S. currently, at the end of March 2010, or 5.6% of total lending in China.
China’s plans to introduce a deposit insurance system to protect depositors from losses caused by banking failures have been delayed by the global financial crisis, Zhou said.
Such an insurance system is also seen as a foundation for interest rate liberalization, as a market-oriented interest rate would end the banks’ built-in interest rate margin and could put depositors at risk.
