Microfinance in China

Backdrop

  • The Chinese government has lifted approximately 400 million people out of poverty in the past 25 years through encouragement of economic development. In the first 25-year phase of development, these efforts were mainly directed at Eastern and Southern China. In August 2008, the World Bank re-classified the poverty line at the equivalent of USD1.25 at purchasing parity values.  At this level, according to World Bank calculations, China still has around 207 million people living at the poverty line.
  • The income gap has been widening as wealth grows in selected areas. As the seaboard areas accumulate ever greater wealth, China’s poor are becoming more concentrated in the west, in regions which have traditionally difficult of access. However, as costs of operation rise on the seaboard, established Chinese corporate leaders are beginning to look to Western and Central China to invest where costs are lower, taking advantage of transport and communications infrastructure laid down in the past five years
  • At least 228 million rural inhabitants are unable to obtain financial services, and the challenge of addressing this problem is firmly on the agenda of the national “New Socialist Countryside” program to improve agricultural practices, the lives of the farmers, and the quality of life in the village.
  • The Chinese traditional culture of high savings gives the market tremendous potential amounts of deposits, but these are rarely recycled in the form of small credits needed by small entrepreneurs and farmers; they are still mostly given out in the form or corporate loans in urban clusters. 
  • Progress in the development of efficient microfinance has been slow and spotty in China over the past 20 years, relative to the kind of progress seen in India and Bangladesh, or relative to the demand in the market, so it is still early days for the microfinance industry:
    • Microfinance organizations’ legal status is either unclear or prevents them from expanding their funding; most of the smaller organizations (with around 3,000 clients) were set up in the late 1990s by international agencies such as UNDP, UNICEF, etc. Many of these operations are now administered under government project offices and are independent of the original agencies. Many of these organizations have ambitions to clarify their legal status and become eligible for investment or financing.
    • Commercial microcredit institutions, set up as limited liability companies, are able to provide credits but are unable to accept deposits, so these are reliant on replenishment through outside financing or investment on a scale that can sustain growth in this credit-hungry market. In the currently rather over-liquid conditions of China’s economy, the government and the State Administration are loath to allow local regions to register additional foreign debt.
    • Regulatory constraints and significant barriers to entry into the small loan market mean that most existing microfinance organizations will need to transform themselves into regulated financial institutions sooner or later; such a mechanism for transformation has existed since 2006 under the China Banking Regulatory Commission.
    • It could also well transpire that these experienced small organizations will ally themselves to work alongside banks with a regulated organization; such new partners could be banks willing to move into the countryside and into the smaller-loan market, some of the better-managed rural credit cooperatives, or the Postal Savings Bank of China.

 

Key Milestones in the development of Chinese microfinance

  •  1989: The first credit scheme is initiated through the Women's Federation of Shaanxi Province as part of an integrated program for women's economic empowerment.
  • 1994: The Rural Development Institute of the Chinese Academy of Social Sciences initiates the first independent Chinese microcredit program as a “research-action” experiment. It receives funding from the Ford Foundation and other international sources. The Grameen Bank of Bangladesh inspires its credit methodology.
  • 1995: United Nations agencies begin to contribute major funding to quasi-governmental microcredit programs throughout China. Other international agencies, including bi- and multi-lateral donors and international NGOs, begin projects of their own.
  • 1998: The Chinese government, particularly through its Poverty Alleviation Office, notes the evidence of high-performance among the pioneering NGO microcredit projects and decides to adopt microcredit as a key tool in "targeting households" with poverty alleviation measures. The age-old subsidized lending program is nominally transformed into a "microcredit" scheme. The Ministry of Finance channels earmarked poverty alleviation funds through the Agricultural Bank of China. The Poverty Alleviation Office plays a management role, which turns out be less that optimal because poor farmers treat the loans not as loans, but as donations from the state.
  • 2000: The first urban microfinance program is begun through the Women's Federation with sponsorship from the United Nations Development Program, and is recognized for its relevance in light of the growing problem of unemployment due to the overhauling of state-owned factories.
  • 2001: Three years of poor performance prompt the Ministry of Finance to cancel the government's microfinance scheme. Poverty Alleviation Offices are no longer allowed to offer microfinance directly. The Agricultural Bank continues to struggle with non-performing loans and some lingering policy-driven lending responsibilities.
  • 2003: New leadership in the Chinese government highlights rural development as a crucial priority. The Rural Credit Cooperatives are subjected to major financial and institutional reform. At the same time, interest rates are relaxed in pilot areas. RCCs are mandated to perform a broad range of microfinance activities, even if these mandates work in opposition to ambitious targets for profitability and commercialization.
  • 2004: The government expands RCC pilot reform into most provinces  but many of these these continue to show high levels of non-performing loans. The People's Bank of China begins an earnest study of the appropriate policy environment for microfinance in China.
  • 2005: The People’s Bank of China (PBOC) announces a pilot program to start commercial lending limited liability companies in  counties of selected provinces.
  • 2006: the China Banking Regulatory Commission (CBRC) announces new guidelines for the establishment of village banks. 
  • May 2008: Joint announcement by the CBRC and the PBoC which is a re-iteration of the regulation of microcredit companies (MCCs)  but also addressed the possibility of conversion of MCCs into financial institutions.