MICROCAPITAL STORY: Relaxed Credit Controls in China May Open Market Opportunities for Microfinance

A number of manufacturing bankruptcies and recent relaxations of credit controls by the Chinese government may allow microcredit lenders to emerge to play a bigger part in the Chinese Economy, according to The China Daily. With the recent bankruptcies by small to medium manufacturing companies in the Pearl River Delta and the jobs lost as a result of this, financial experts are looking to the restrictions on lending in China. Experts including Wu Xiaoling, vice-chairwoman of the Financial and Economic Committee of the National People’s Congress and Xu Xiaonian, a professor of economics and finance at the China Europe International Business School both spoke recently about the importance of private financing for enterprises as opposed to large, state-run banks.

Over the last few months, the People’s Bank of China has suggested more relaxed credit restrictions, and a statement that the credit controls’ days may be numbered came in June from Zhou Xiaochuan, China’s central bank governor. The central bank pushed the reserve requirement to a record 17.5 percent in June, but on October 8 it was announced that the deposit and lending rates would be lowered by 0.27 percentage points from Thursday and the reserve-requirement ratio would be down by 0.5 percentage points from Oct. 15, the People’s Bank of China (PBC) said. Accompanying this is a joint statement release by the PBC and the China Banking Regulatory Commission on May 4, encouraging more microcredit firms to be established in different provinces to help finance small businesses – provided the provincial local government could serve as guarantor of the micro loans and supervise the operation of the microcredit firms.

These financial regulations are further enhanced by efforts over the past few months revealed in news releases by the PBC that “further efforts should be made to deepen the reform of rural credit cooperatives (RCCs)” to “vigorously” develop new financial institutions that are in tune with rural needs, such as village and township banks, microcredit companies and rural credit shops. A previous article in The China Daily reported that the central bank and other government agencies have jointly requested banks to increase their lending to the small- and medium-sized companies whose capitals are drained by rising costs. The PBC released a report in September stating that financial institutions are encouraged to create innovative credit products for small enterprises and trade financing facilities and that the channels for small enterprises’ direct financing must be expanded to guide private capital in the direct financing market for small enterprises and improve the financing environment for small enterprises.

China has the largest untapped microfinance market in the world, with a population of 1.3 billion, 900 million of those people residing in rural areas, however only 25 percent of rural households have access to formal credit and micro-credit but is hampered by unfamiliarity and a lack of clear regulations. Microenterprises in China are defined as having less than seven employees. In 2003 there were 25.7 million such microenterprises, most of them private businesses active in urban and township areas, according to a report prepared by the German Technical Cooperation (GTZ).

The People’s Bank of China (PBC) was established in 1948 based on the consolidation of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. In September 1983, the State Council decided to have the PBC function as a central bank. The balance sheet at the end of 2007 had total assets of the “monetary authority” listed as 16.9 trillion yuan (USD 2.4 trillion).

By Lori Curtis, Research Assistant

Additional Sources:

The China Daily: “Microcredit lenders emerging in China”

The China Daily: “Relax money policy, not price control”

The China Post: “Central Bank may loosen up its lending”

The Financial Express: “China plans to tap microfinance: IFC”

Microfinance Gateway: “Microfinance in China and Development Opportunities”

The People’s Bank of China: “Guide the Reasonable Growth of Money and Credit, Optimize Credit Structure and Step Up Credit Support to the Agricultural Sector, Small Enterprises and Post-disaster Reconstruction”

The People’s Bank of China: “Further Improve the Micro Loan Management and Promote Enterprise and Employment”