MICROCAPITAL STORY: Small Business And Rural Finance In China - Low Leverage Ratios

In Zhang Jiawei’s recent report on the China Daily entitled ‘Micro-finance companies’ bank financing ratio won’t rise’, the head of the cooperative supervision department at the China Banking Regulatory Commission (CBRC), Zang Jinfang, was quoted as saying at a recent forum on rural financial development in Tsinghua that the ’50 percent limit on microfinance companies’ bank financing ratio will not be eased in the short run’. Currently, information (in the English language) verifying and clarifying Zang’s quotation above is not available in the public domain. It was reported that Zang recently came under pressure to raise the current ratio applicable to microfinance companies in China. However, Zang was quoted as saying that it is not the right time to ease the ratio as it may lead microfinance companies to pass their risks on to their lenders.

The current rules, details of which cannot be found in the public domain, limits both the financial leverage of Chinese microfinance companies and the amounts these institutions can borrow from commercial banks. This in turn inhibits their prospects for growth and expansion in what has recently become an illiquid credit environment. Zang suggested that microfinance companies can still try to raise finance by granting short term loans or by increasing capital funds, rather than relying predominantly on bank loans. He Guangwen, a professor with the school of finance at the China Agricultural University, was said to have disagreed with Zang’s views. He noted that the 50 percent limit lowered the financial leverage of Chinese microfinance companies thereby making it harder for these companies to increase profits. Jiao Jinpu, former deputy chief of research at the CBRC was quoted as saying that the 50 percent limit is reasonable during the early phase of a microfinance company’s business and suggested that the limit may be eased to 100 or even 200 percent at the appropriate time.

Microfinance is not a new item on the CBRC’s agenda, although the dominant aspect of microcredit in China in the past decade has been the financing of micro-enterprises and farmers in the country’s extensive rural areas. As previously reported in the China Daily, efforts have been made in the past decade to enhance innovation in the delivery of financial services to small businesses and farmers, particularly in China’s rural communities. Regulators have attempted to improve supervision of rural financial institutions and rural credit cooperatives. Details of ongoing reforms in rural finance in China can be obtained in a report on ‘Rural Finance Reform In China’ by Chen Xiang Liu which was published by the Universite Paris Oest Nanterre La Defense and is available on the Microfinance Gateway portal. Access to rural finance has become increasingly important in the current credit crisis as urban workers that have lost their city jobs return to the countryside in search of employment.

In February 2008, the CBRC held a meeting on the supervision of small and medium sized rural financial institutions. A summary of the meeting, which is available on the CBRC website, notes that since reforms in rural financial services were introduced in the preceding 5-year period, the total assets of small and medium rural financial institutions grew from 2.2 trillion yuan (approximately USD 0.3 trillion) to 5 trillion yuan (approximately USD 0.7 trillion) and the percentage of farmers with loan coverage grew from 28.6 percent to 32.8 percent. It has not been possible to obtain more up to date figures in this regard.

In March this year, CBRC’s vice chairman Wang Zhaoxing was interviewed by Xin Hua News agency on the CRBC’s policy on promoting small business and rural finance. Wang stated that the CBRC defines a small business as one with total assets amounting to less than 10 million yuan (approximately USD 1.4 million) or an annual revenue not exceeding 30 million yuan (approximately USD 4.4 million). He added that these businesses have difficulties securing finance from commercial banks because of a variety of reasons including the inability to supply collateral, a weak market position and poor risk and internal management. He noted that the CBRC will continue to encourage big and medium sized commercial banks to increase their lending to rural households.

As stated in the article ‘Easier Way To Countryside’ on the China Gate website, a portal dedicated to development and poverty related issues in China, additional reforms were also introduced to make it easier for foreign banks to provide funding in the rural areas through a single unit or a locally incorporated subsidiary. As noted in a previous entry on the Microcapital portal, HSBC became the first commercial bank to set up a rural banking facility in China in 2007. In a recent press release on the HSBC website, it was noted that the bank has just launched its fifth rural bank in mainland China. The English Standard Chartered bank has also entered the rural finance market in China. According to a recent report on the Shanghai Daily, Standard Chartered bank has set up a wholly-owned subsidiary in Inner Mongolia in the form of a village bank with a registered capital of 10 million yuan (approximately USD 1.4 million). Citigroup has also set up rural banking facilities in China, as noted in a former story on the Microcapital portal, although a report on the Shanghai Daily notes that unlike HSBC and Standard Chartered, Citigroup’s lending companies in China are not permitted to take deposits at this stage. It is not possible to obtain up to date figures representing the amount invested by each of these banks in China’s microcredit sector.