The Microfinance Gateway would like to thank the following individuals for contributing their rich insights and experiences and making this series of highlights on China available to our readers: Enjiang Cheng (Centre for Strategic Economic Studies at Victoria University), Thorsten Giehler (GTZ), Holger Grundel (DFID), Sarah Tsien (PlaNet Finance), Andrew Watson (Ford Foundation), and Xu Zhong (People’s Bank of China).
The People’s Bank of China (PBC), China’s central bank, estimates that only 25% of rural households have access to formal credit. With a population of 1.3 billion the potential of microfinance in China is huge, but largely untapped. Rural finance represents a particular challenge, especially with 900 million people living in rural areas.
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Microenterprises in China are defined as having less than seven employees. There are presently 25.7 million such microenterprises, most of them private businesses active in urban and township areas. Source: Microfinance in China and Development Opportunities, 22 October 2003, GTZ (unpublished report). |
At the same time, the infrastructure for delivering financial services to China’s poor is, in many ways, already there. A vast network of rural credit cooperatives, city commercial banks, government programs like the Agricultural Bank of China (ABC), and several, donor-funded pilot programs may have already laid the groundwork to build a sustainable microfinance sector.
Identifying the strengths and weaknesses of existing programs is a first step toward realizing their full potential. But in all cases, realizing that potential will take more than a “template” approach, cautions Dr. Enjiang Cheng of Australia’s Centre for Strategic Economic Studies .
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Financial service providers in China Rural Areas Urban Areas Source: GTZ presentation at Asia Forum on Financial Sector Reforms in China, Frankfurt 26 Oct, 2004. |
The Story So Far
Existing microfinance programs, in China are concentrated in very poor and remote provinces in the West and Central areas of the country, where a large proportion of microloans have been targeted to agricultural activities. Nearly 300 of these are donor-funded microcredit projects, most of which replicate the group-lending model made popular by Bangladesh’s Grameen Bank -- deliberately reaching out to women, accepting non-monetary collateral or group guarantees, and requiring clients to save a set portion of their income.
Funded by some USD 50 million in aid over the last decade, some of these projects show promise, especially those with excellent loan repayment. Some of the more promising programs charge interest rates of 12-18 percent, higher than those of state-run lending programs. Still, these rates fall far short of those typically charged by the informal sector in China. Further, these rates are lower than sustainable microfinance institutions in other countries, leaving many microlending pilots in China dependent on subsidies and technical assistance. For the microlending programs that are profitable and manage excellent loan repayment, the next challenge is to be licensed, access funding, and grow at a manageable pace. The People’s Bank and China Banking Regulation Commission (CBRC) are considering licensing for credit-only microfinance institutions, and they are analyzing global lessons and experience for an appropriate regulatory framework that can be adapted to the Chinese context.
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International Groups Active in China International NGOs: Donors: International Foundations or Private Sector Donors / Investors: Banks, Investment funds or Private Investors (including domestic actors): |
According to Cheng, financial services in China’s rural areas have been “dominated by rural credit cooperatives at the county and township levels.” These cooperatives offer wide access to savings services, accounting for 11.5 percent of total deposits in the banking sector. Yet, although 85 percent of agricultural loans originate with these cooperatives, other loan products are relatively rare. In fact, total rural microloans account for only 10 percent of the banking sector’s total outstanding loans.
Rural credit cooperatives, or RCCs, were established during the rural cooperative movement in the 1950s. They have an extensive network, with more than 32,000 branches covering most townships in China and employing some 62,800 people. There are also 2,441 RCC unions at the county level, 65 at the prefecture level, and 6 at provincial level.
Given their sheer breadth of outreach, RCCs offer an exciting option for scaling-up access to financial services. Nonetheless, RCCs face several challenges. Estimates of non-performing loans (NPLs) range widely, although estimates as of 2001 suggest that average national NPLs for RCCs was 44 percent, with 46 percent of RCCs nationwide making losses.
The Chinese government recognizes both the potential and deficiencies of rural cooperatives, and a nationwide reform program is now underway. In June 2003, the State Council approved an RCC pilot reform plan which was implemented in seven provinces and in one city: Zhejiang, Shangdong, Jiangxi, Guizhou, Jilin, Shaanxi, Jiangsu and the city of Chongqing. The main objective of the reform is to expand farmers' access to loans and improve RCC services in rural areas. In addition, some RCCs have been allowed to become rural cooperative banks and commercial banks. The pilot reform program was expanded by the PBC and CBRC in 2004 to include all provinces.
Writing the Next Chapters
The government’s commitment is clear. Dr. Xu Zhong, Deputy Director of the Financial Stability Bureau of the People’s Bank of China, told the Microfinance Gateway that policymakers are keen to “encourage the credit cooperatives, community banks and real cooperative financial organizations to do microfinance business.”
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The China Association for Microfinance aims to conduct research, promote best practices, offer training (currently administered separately through the Citi-China Microfinance Training Centre), and provide information sharing activities such as a website and regional/national annual meetings. The next meeting will be held in China on Nov 9-10th, 2005 and international groups are invited. The Network was founded by the Chinese Academy of Social Sciences, the China International Centre for Economic and Technical Exchanges, China Foundation for Poverty Alleviation, and the All-China Women’s Federation. There are currently 60 prospective county-level MFI members, and an Advisory Committee that includes representatives from Citigroup, The Ford Foundation, PlaNet Finance, the Philippines Microfinance Network, and Grameen Trust. To learn more about CAM, please visit: http://www.chinamfi.net/ |
But Xu also points to the need for diversity at the institutional level. “The same support should also be offered to large national banks, policy banks, and postal savings banks for them to engage in microfinance,” he added. These are encouraging words to China’s microfinance advocates. Encouraging other actors will likely improve supply and quality of services to clients.
With institutional diversity already on the agenda, the challenge now is to strengthen institutions that can provide financial services to China’s low-income people while at the same time making room for new commercial actors, according to Sarah Tsien, China Country Representative of PlaNet Finance.
“The critical challenge for practitioners and donors today is how to support the creation of a fresh new commercial approach to microfinance while encouraging the gradual transformation of fledgling NGO experiments,” she says.
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Interest Rate Ceilings Global Findings Concerns about the high costs of microfinance and predatory lending practices have led policy makers to use mandatory interest rate ceilings as a means to protect customers. An analysis of the impact of interest rate ceilings revealed that in fact, they do not have the desired effect, making it impossible for formal or semi-formal microlenders to cover their costs and driving them out of the market. Ceilings can also lead to less transparency about the costs of credit, as lenders often add confusing fees for their services. The CGAP study concluded that a more effective way of reducing both microcredit costs and interest rates is to promote competition among credit providers, combined with relevant consumer protection measures such as truth-in-lending laws. The Chinese Context The PBC is slowly but steadily creating new opportunities for lenders. Since 1996, the PBC has cumulatively liberalized, unified and eliminated restrictions on 118 interest rates of domestic and foreign currency products. So far, there remain restrictions on 30 interest rate products in both domestic and foreign currencies. While developing capacity in financial institutions, the PBC plans to further increase their autonomy in determining interest rates and to give interest rate a greater role in optimizing financial resource allocation and in macroeconomic management. Source: Interest Rate Ceilings and Microfinance: The Story So Far, 2004, CGAP. Access to Finance for Chinese Poor Households and Micro, Small and Medium Enterprises, 2005 (unpublished paper). |
Many RCCs, for example, suffer from loan delinquency, accumulated financial losses, and ownership and governance problems. Government poverty lending programs have offered subsidized interest rates and have experienced poor loan repayment. With NGO programs, including those funded by external donors, savings services are virtually non-existent since it is technically illegal for non-financial institutions to collect savings. In most areas of the country, there is little competition among institutions serving low-income clients, leaving little incentive for them to improve their management and services.
Consumer credit information, when available, is largely unreliable. Management capacity within the diverse range of institutions must be strengthened. The good news is that organizations like the China Association for Microfinance are exploring ways to further build the skills of microfinance managers and advocating for policies that will enable MFIs to be licensed and grow.
And the government is responding. Although both PBC and CBRC are focused on overall financial sector reform in the rapidly growing national economy, they are also studying issues of rural and microfinance and introducing reforms in formal institutions such as RCCs, ABC, and other commercial banks. Recent advances include the lifting of interest rate caps in urban areas.
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Money Transfers in China The market for domestic remittances of migrant workers in China is huge and projected to grow over the next 5 to 10 years, given high growth of the Chinese economy (annual GDP growth is around 9 per cent) and a large surplus of labor in rural China that is moving out of agriculture and rural areas. The total volume of funds per annum that could be remitted home by migrant workers, or the potential market for remittances by migrant workers in China, is estimated between ¥169 billion (US$20.86 billion) and ¥300 billion (US$30.04 billion) for 2004 and between ¥191 billion (US$23.58 billion) and ¥330 billion (US$40.74 billion) for 2005. A report prepared for CGAP recommends the following measures: - Provide consumer information on remittances options and consumer protection measures Source: Domestic Money Transfer Services for Migrant Workers in China, 2005. |
No Stopping
With the world’s largest population, China has found its own ways to combat poverty, especially in rural areas. Some policies have fared better than others, but where they have had an impact, that impact has been staggering. In the last decade alone, economic growth in China of 9 percent average annual GDP growth has far outpaced that of its regional neighbors. That China has achieved much of this progress, not through international donor assistance, but by developing its own, robust domestic markets bodes well for microfinance.
“The challenge of microfinance, after all, is not to create an altogether new financial system for the poor, but to make existing financial systems more inclusive,” says CGAP’s Jennifer Isern, who has been working with Chinese practitioners and policymakers to help remove the main obstacles to greater financial access.
The political will is there. “If government concerns can be addressed practically – offering China-specific solutions – and if the potential for success can be proven convincingly, then those who offer early support in the spirit of true partnership can expect a head start,” says Holger Grundel of the Department for International Development. “Once an idea has taken root it is very likely that the Chinese solution will be faster and cheaper and there will be no stopping its replication on a very large scale.”
Learn more by reading what experts Enjiang Cheng, Holger Grundel, and Andrew Watson, and Xu Zhong have to say.