PRIVATE lenders may soon come out from the gray zone as China for first time will legalize private lending to increase financial support for the agriculture sector and smaller enterprises, a central bank official said yesterday.

But regulators will keep a high-profile stance over shark loans and other illegal activities accompanying the lending activities, Xinhua News Agency reported yesterday, citing an unidentified central bank official.

Referring to individuals, enterprises and other organizations that are not part of the current financial system, the official recognized private lenders' role in supporting small and medium-sized enterprises (SMEs) and the agricultural sector, which have been more or less neglected by formal financial institutions under China's tight grip on credit.

"There is no such concept as 'private lending' in the currently legal system," Xinhua quoted the central bank official as saying. "But it is already a natural outcome when formal financial institutions failed to meet all social demands. Private lending can help enrich the current financial system."

The comments came after the city of Wenzhou, which suffered a severe debt crisis since April, released a plan to officially use private capital to help tackle the debt problems of local SMEs.

"Wenzhou will set up 100 micro-finance firms, two to four private capital management companies, and a private financing register center," the local government said in a statement on Wednesday, "These measures will help make private lending transparent and legal."

Wenzhou will also pilot the market-based reform of interest rates, allowing the deposit and lending rates to reach up to four times the benchmark rates, the statement said. Loans with lending rates exceeding four times the benchmark are considered shark loans under Chinese law.

During the debt crisis that swept Wenzhou, an economic hub in eastern Zhejiang Province known for its successful entrepreneurs, more than 80 local businessmen disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders.

The crisis was not eased until October, when the Zhejiang government ordered bank bailouts of private firms.

"Compared with formal institutions, private lending has its advantage such as easier procedures, greater flexibility and lower transaction cost," the central bank official said yesterday. "Private lending is a necessary supplement to the formal system, and can help solve the financial difficulties for SMEs and rural activities."

The official pledged to make laws to guide private lending activities and fight illegal activities such as shark loans, money laundering, fraud, financial pyramid schemes, and personal injuries resulting from violent collection of debt payment.

"We shall draw rules to support legal private lending," the central bank official said.