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Microcredit lenders ermerging in China

By Wang Lan (China Daily)
Updated: 2008-10-06 10:20

A self-employed businessman (right) in Lingyang township of Rizhao city, East China's Shandong province, counts his micro loan from the Lingyang rural credit cooperative. [China Daily]

Microcredit lenders, once the quaint peripheral players in China's mammoth financial system, are emerging from the shadows of the State-owned banks as white knights to thousands of small, cash-strapped manufacturers around the nation.

The spate of bankruptcies in the manufacturing sector, particularly in the Pearl River Delta region, has prompted the government to act by selectively relaxing credit controls three times in the past two months.

But many economists and financial experts remain doubtful as to whether the large commercial banks would be prepared to spare their administrative and marketing resources for the much less cost-effective business of making micro loans. In a recent forum in Beijing, officials and experts emphasized the importance of promoting private financing as a major source of funding to small businesses.

"It is time to lift excessive regulatory restrictions on private financing, which could help boost the dynamics of enterprises as well as improve the capital efficiency of the financial industry as a whole," Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People's Congress, said at a financial forum in mid-September.

Xu Xiaonian, a professor of economics and finance at the China Europe International Business School, said at the same forum: "It is urgent for us to recognize the increasing importance of commercial credit, which can help improve financing efficiency to help companies grow."

Their concerns were apparently shared by the government. In mid-August, it introduced new incentives to encourage microcredit lenders to provide more loans to small companies engaging in labor-intensive manufacturing activities and to retrenched workers to finance start-up businesses. In addition, the central bank has allowed qualified microcredit lenders to source funds in the inter-bank money market for on-lending to their customers.

The projected growth of the microcredit business will have a far reaching impact on China's financial markets by channeling part of the huge deposit base of the banking system to finance the growth of the vibrant private sector, which, unlike the staid State-owned sector, is made up primarily of many highly competitive and adaptable enterprises. Lenders will have to learn to assess the credit worthiness of this class of borrowers by their cash flow and growth potential rather than by asset value and government guarantee.

Microcredit is nothing new in China. In 2005, the People's Bank of China, the central bank, initiated a pilot scheme to develop microcredit firms in different provinces, with the original intention of financing agricultural production and supporting the livelihoods of the rural poor rather than the manufacturing industry. In recent months, microcredit loans have been directed toward small businesses that have taken a hit under the tightening monetary policy adopted to battle inflation.

The establishment of the first two microcredit firms, Shanxi Rishenglong Microcredit Co and Shanxi Jinyuantai Microcredit Co on December 27, 2005, was widely seen as the beginning of justification for private financing, whose development had been for a long time stifled as its status was not recognized. Since then, both decision makers and businesses have gradually accepted private financing as an alternative source of funding to substitute traditional bank loans.

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