New players emerge to finance China's small, emerging firms

As China's small and medium-sized enterprises, mostly shunned by banks, scramble for funds, non-banking financial institutions are growing fast.

The NBFIs provide a more flexible, customized financing source for SMEs.

"With the sudden expansion of China's credit supply, financial disintermediation has become increasingly prominent in the country," Liu Zhiqiang, chairman of CITIC Asset Management Co, and a professor at the PBC School of Finance at Tsinghua University, told China Daily in an interview.

The Central Committee of the Communist Party of China is signaling support for financial innovation. A document issued on Friday after the Third Plenary Session of the 18th CPC Central Committee offered encouragement for the diversification of financial products.

The document also calls for expanding the channels of equity financing, developing the bond market and promoting direct financing to introduce more competition.

Eight years ago, when Liu took over CITIC Asset Management, it was a small subsidiary of the State-owned CITIC Group, with only 12 employees. It didn't break even for three years.

But through innovation, the company's activities now include the management of nonperforming assets, pawn loans, financial leasing, business factoring and equity investment.

It has total assets of more than 10 billion yuan ($1.64 billion), and it made 300 million yuan in profits in the first 10 months of this year.

NBFIs provide banking services without meeting the legal definition of a bank. They don't hold banking licenses, and they're often said to be part of the "shadow banking" system.

"Shadow banking in China is traditionally the off-balance- sheet business of banks, such as entrusted loans, bills of acceptance and so on", said Liu.

"Now, the definition is expanding to non-bank financial business, including pawn loans, financial leasing, small loans and private-sector loans made beyond the supervision of the government," said Liu.

About 20.5 trillion yuan was involved in shadow lending in China as of the end of 2012, including wealth management products, bank trusts, financial leasing and private lending, according to a report published in October by the Chinese Academy of Social Sciences.

"The fast growth of the non-bank financial sector results both from the support of the government and the needs of the market," said Liu,

"At the same time, it reflects the flaws of China's financial system, which could be summarized as insufficient competition, strong monopoly power and irrational resource allocation."

The pawn business, which dates back thousands of years in China, has grown into an important part of the NBFI sector.

"Pawn businesses have evolved from outlets serving as an emergency source of individual finance into a special, modern financing channel with characteristics of the service industry, such as product appraisal, sales and storage," Zhang Shudong, inspector of the circulation industry development department of the Ministry of Commerce, said at a recent news conference.

Some 90 percent of the pawn industry's customers are SMEs and individual entrepreneurs, according to Zhang.