Wokai's China Microfinance Series: Chinese Government to Legalize Private Lending & Other Recent Developments

George Scott

The Chinese government has taken positive steps in an attempt to mitigate the effects of widespread unemployment brought on by global economic downturn.

The government has warned that this year would be “the toughest” since the turn of the century. Huge job losses in the heavily labor intensive industries, construction and manufacturing have left 20 million migrant workers without work and home, since, in many cases, their accommodation was provided by their employer, leaving them with little choice but to return back to their towns and villages across the country.

An article published in chinaview read “In a statement on its website posted Feb. 20, the PBOC -- the central bank -- said it would formulate regulations on private lenders and develop the sector into “a significant player” in the country's rural money markets. It hasn't said when the new regulations would take effect.” In effect granting it legal status, allowing private lending to occupy a legitimate place in the countries financial marketplace.

In mid-August last year the government introduced new incentives to encourage microcredit lenders to provide more loans to small companies engaging in labor-intensive manufacturing activities, expanding the credit limit for the first time and making statements encouraging laid-off workers to become entrepreneurs. 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.



This action is important in combating an already chronic capital shortage in rural areas and risks further aggravation d ue to the economic downturn. This capital shortfall, mainly due to an industry reshuffle in the early 90’s which forced most state banks to withdraw from rural areas, leaving behind only the Agricultural Bank of China, rural credit cooperatives and postal savings banks. Many of these institutions limited their rural lending; though fear of bad debt and low profits. This brought about a situation were rural deposits was being used to finance production in larger more affluent cities and not in the towns and villages were the deposits were actually held.

Relaxing regulation on private lending and encouraging the growth of the microcredit business will have a far reaching impact on China's financial markets. 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.

"People are becoming more aware of the fact that private capital is playing an increasingly important role in funding the growth of small enterprises, and more private capital is being pumped into small enterprises in the form of microcredit to help ease their capital shortage," Zhou Dewen, president of Wenzhou's council for the development and promotion of small and medium-sized enterprises, says.

Recent positive steps taken:

By end of 2006:

· China Banking Regulatory Commission (CBRC) relaxed the conditions of entry for banking institutions in rural areas. Which meant investors were able set up new types of rural financial institutions such as township and village banks and rural mutual cooperatives.

· Minimum registered capital for rural institutions was reduced

· For Credit-cooperatives from 20 million RMB to 10 million RMB

· Rural credit unions, from 10 million RMB to 5 million RMB.

· For larger township and village banks, the amount was set at 1 million RMB

· Loan companies 500,000 RMB and

· Rural mutual cooperatives 100,000 RMB, respectively.

 
By end of 2007

· Licenses were granted to 38 new types of rural financial institutions, including 25 township and village banks, four l  oan companies and nine rural mutual cooperatives.

 · The proportion of rural households having access to bank loans reached 33 percent, which benefited more than 300 million farmers.

· CBRC expanded the list of qualified micro-credit lenders to include all banking institutions, as well as broadening target industries from planting and breeding to all agriculture-related business.

 · The size of credit lines was increased from 3,000 RMB - 5,000 RMB, to 10,000 RMB -  3million RMB. And loan terms got longer, rising from less than one year to as long as three years. Floating rates were also allowed.

 · Rural finance was opened to allow participation by private-sector and foreign institutions: In December 2007, the HSBC. opened its first rural bank in  HubeiProvince, marking the first entry by an international bank into a rural area of China.

Source: Chinaview Contact Centre solutions Community

Comments

[Bing Wu]

See also my post on the similar topic: China Contemplating Loosening Capital Requirements on Private Lenders at http://mfi-china.blogspot.com/

Like everything else, banking regulation comes at cautious, if not glacial, pace. The regulators are concerned that banks may take advantage of the loose capital requirements on small-loan institutions and take on unwarranted risks. The ongoing financial crisis certainly doesn't help the reformer's case.

In fact, the "Lender's Law" has been in discussion since 2007. But industry insiders are still not sure how soon the law will pass.

In the meantime, entrepreneurs are finding way to get around to find their financiers. The key is low profile, small amount and proper political cover/protection.