Rags-to-riches tales from micro-financing growth

BEIJING -- Rags-to-riches tales are no longer the stuff of fiction in China's villages, where grassroots financial institutions are making it possible to start a business from scratch.

And the fast development of such micro-financing is set to further accelerate after an announcement from a just-concluded key economic meeting of the central authorities.

The motivation to bolster rural micro-credit comes from success stories like that of Liang Anxue. When a typhoon destroyed more than half of his 70 hectares of betel nut and rubber plants in 2005, Liang, a farmer in south China's Hainan Province, felt desperate as he had little money left and no qualification to borrow from banks.

However, he was advised by a rural credit cooperative to mortgage his forest right certificate for financial aid to restart his business, and now, eight years later, Liang has his own betel nut business thanks to micro-credit aid from the cooperative.

The co-op that helped change Liang's life is one form of grassroots financial institutions that have flourished in recent years as China looks to redirect its reforms to benefit the real economy.

Now, China has vowed to improve the efficiency of its financial functions and bring more benefit to the real economy, according to a statement released on Friday after a four-day central economic work conference held to set the tone for policymaking for the year ahead.

Meanwhile, a decision was made at the major Communist Party of China meeting in November to push financial reform by encouraging innovation in products to benefit the grassroots.

"Instead of a government-led policy push, financial reforms in recent years have focused more on bottom-up innovations, which nurture small businesses and farmers," said Yang Tao, director of the Financial Market Research Office with the China Academy of Social Sciences.

"That lays a more solid foundation for China's overall financial reform," Yang added.

China has over 60 million enterprises, about 99 percent of which are small firms, and about 800 million farmers, who usually lack access to traditional banking and other services due to limited collateral and credit records.

But the boom of micro-credit is making a difference. According to a report from China's central bank, by the end of September, 7,398 micro-credit firms were dotted around the country with their outstanding loans reaching over 753.5 billion yuan ($123.23 billion).

Over 86,000 micro-credit practitioners, China's answer to Muhammad Yunus, the Bangladeshi banker credited with pioneering the concept of micro-finance, have been going door to door to visit small business owners and farmers to offer them financial advice and services.

Short-term business or farming investment demands boosted grassroots finance for those who lack access to traditional loans. In China, grassroots financial institutions generally include township banks, rural mutual funds and micro-credit loan and guarantee firms whose main clients are small businesses and farmers.

They have a lot to offer in China's push to speed up urbanization, alleviate poverty and beef up employment, according to renowned economist Li Yining.

Li called for more support policies to nurture grassroots finance, such as relaxing access thresholds, and setting up tailored insurance firms to offer guarantees as well as guilds to supervise them.

It is not just specialized financial institutions' mission to promote grassroots finance; larger banks also have a big role to play in tapping the micro-credit services market, he added.

However, high costs and risks may challenge the growth of grassroots finance as most small businesses and farmers lack sufficient credit records and awareness of banking norms. Non-performing loans and even "runaway bosses" who abscond with unpaid debt are undermining grassroots finance's sustainable growth.

A more rigid and sound law system is needed, and the cultivation of a credit-value culture is important for the development of this sector, said Tang Ning, CEO of CreditEase, a Chinese micro-credit firm.

Over the next five years, China will cultivate a social credit mechanism by expansively recording and sharing credit information, especially for small businesses and farmers, according to a report released by China's central bank.

The development of grassroots finance depends on improving the credit culture and legal environment, and will in turn speed up the reform of China's financial system, Tang added.