MICROCAPITAL STORY: The Push and Pull of China’s Microfinance Expansion

A series of key events over the past three months in China have indicated that microfinance is making steady, but slow, progress in its expansion. These events include the Microfinance Investor Conference, held in Beijing in December 11 and 12, 2008, which brought together Chinese MFIs, international investors and other stakeholders and provided an overview of the Chinese microfinance landscape; Citigroup Inc., one of the world’s largest financial conglomerates, opening up in China’s rural areas; and finally the Chinese government’s relaxation of financial constraints intended to increase capital flows. In a brief analysis of these events over the last three months, the following provides a brief examination of China’s microfinance industry.

Citigroup Inc. received approval in October 2008 to open two microcredit firms in Hubei, a rural province in China, and was covered by MicroCapital in this story. This came as its major rivals, HSBC and Standard Chartered began opening rural outlets throughout China. Citigroup already had eight branches and 20 sub-branches on the mainland of China and is the first international bank setting up microcredit firms in China. It has already set up the first of the two microcredit firms in Hubei, the second will be located in Chibi sometime in the first quarter of 2009.

The Microfinance Investor Conference held in Beijing brought together representatives from the GTZ, the International Finance Corporation, the China Development Bank, a variety of Chinese micro-credit companies (MCCs), the People’s Bank of China (PBC), PlaNet Finance, Goodwell Investments, the Financial and Economic Affairs Committee of the National People’s Congress and Deutsche Bank Research. The topics included the investment targets of various Chinese MCCs and the microfinance investment landscape in China. The discussions of some speakers are observed further below.

Finally, there have been a number of reports discussing the relaxed credit controls in China, and these were covered in this MicroCapital story. China has responded to the effects of the global financial crisis by relaxing credit controls by lowering deposit and lending rates, as well as the reserve-requirement ratio. Additionally, the PBC has made statements encouraging the development of rural credit cooperatives.

Microfinance has been described as not running as well in China as it has in other parts of the world, and, at worst it has been described in 2006 by Sarah Tsien, a consultant with IPC, as “… quite a disaster in China. Overall, it never achieved a scale of sustainability”. While MFIs in South Asia have clients numbering in the millions, most of China’s organizations remain relatively small, with clients numbering closer to three thousand. A scan of news articles on Chinese microfinance throughout the past few years results in a number of articles in which various sources describe microfinance as being “poised for a significant expansion” and moving “from experiment to large-scale commercial development”. While it is difficult to hold back from stating the same claim as those cited before, a review of the above mentioned recent events may lead observers of Chinese microfinance to believe that the expansion is continuing at an increasing pace.

At present there are five state-owned banks representing 55 percent of total banking assets, twelve joint stock banks representing 11 percent of total banking assets, three development banks with 5 percent, 80 foreign banks with 2 percent of total banking assets, 25 thousand rural cooperative banks and rural commercial banks with 7 percent of total banking assets and over 1200 microcredit companies, village banks, non-governmental organizations (NGOs), and pawn shops representing an unreported share. Rural areas have experienced a decrease in financial services, with more than 30 thousand branches being closed throughout the country and with a limited variety of formal financial institutions operating in rural areas.

The GTZ has defined one of the main challenges to economic development as an “east-west, public-private and urban-rural divide in the financial services offered by its banking sector”. At the Microfinance Investor Conference held in December, Thorstein Giehler cited the main obstacles for microfinance investors in China as being the lack of network structures which makes screening time-consuming, the size and ownership structure of NGOs, the lack of transparency of MFIs, geographic limitations and caps on maximum investments. According to a recent article in China International Business, the main challenges to microfinance in the past have been a lack of legal status and regulatory challenges. As methods to overcome these have been implemented in the last year, it highlights best practices and missions of MFIs as a greater problem, as MFIs seeking to earn returns for their investors create a new challenge.

The GTZ has begun work with the People’s Bank of China to apply its knowledge to influence economic development through microfinance so that it is not limited in its ability to enforce its credit and monetary policy in the informal sector. The PBC has chosen five pilot provinces to participate in the establishment of formal specialized microcredit institutions through the implementation of a new provisional regulation. Additionally, a representative from the IFC revealed that it would be testing four business models in China; rural commercial banks, microfinance companies, village and township banks and service companies. These initiatives, combined with the increased competition between international banking conglomerates for China’s rural clients seem to be facilitating the continued expansion into the vast potential of China’s microfinance industry.

By Lori Curtis, Research Assistant

Additional Resources:

China Daily: “Citi goes to nation’s countryside

China International Business: “Giant Steps

China Microfinance Association: “Home” “History

GTZ-China: “Microfinance and Rural Financial Sector Reform” “Microfinance landscape in China: Opportunities for Investors

Knowledge at Wharton: “Microfinance in China: Growth and Struggle

MicroCapital Event: “Microfinance Investor Conference, December 11-12, 2008 in Beijing, China

MicroCapital Story: “Citigroup Opens Two Micro-Credit Firms in China Following Recent Rural Banking Initiatives by HSBC Holdings and Standard Chartered in the Region

MicroCapital Story: “Relaxed Credit Controls in China May Open Market Opportunities for Microfinance

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