From Nation, page 9 - 11, issue no.379, Aug 4, 2008
Translated by Ren Jie, Zuo Maohong
Original article: [Chinese]

Though community-based financing has long been popular in modern-day China, many such companies have been operating underground or semi-legally. Recent guidelines by the Chinese government on microfinance companies may open the door for them to be formally accepted into the mainstrean banking and financial system, and hopefully help curb usury businesses.

In Part I of this two-part series, we check out two pilot regions where micro-financing is being tested - Pingyao, the banking center of ancient China, and Wenzhou, the cradle of private capital following China's economic reforms. In Part II, we invite a Chinese banking expert to talk about challenges facing micro financing.

Pingyao's Micro Loan
Pingyao City in coal-rich Shanxi province, China, is known as the first banking capital of the country, dating back to the hayday of the Silk Route trade during the Ming and Qing Dynasties.

In 2005, it gained another first in modern China -- the government made it one of the first pilot regions for microfinance to be tested. The main targets for such financing were farmers and lower-income groups.

Pingyao's Ri Sheng Long Micro Loan Limited was the first microfinance company approved by the Chinese government that year. Its boss Liu Weihui made his first bucket of gold in the 1990s from the coal business, and he seized the first opportunity to channel his capital into finance the moment the pilot project was announced.

The company's assistant general manager Cheng Wenqing told the EO that risk control management was the main concern as borrowers were mainly low-income farmers. He said village committees played a major role in helping to assess borrowers credibility, as these committees knew their respective villagers well and would act as guarantors if bad debts occurred.

Yanjiazhuang Village is one such example. There, some 70 families had applied for loans from the company, each borrowing between 2,000 and 3,000 yuan. The village committee director Pei Wu said he would never recommend ill-behaved villagers for loan application, adding since Ri Sheng Long was founded, no bad debt was recorded among borrowers from his village.

Though villagers had proven themselves as prompt payers, the interest rate charged on micro loan was still four times higher than the standard rate perscribed by the Chinese central bank. The high rate was part of microfinance companies' hedging strategy.

However, microloans were still popular in Pingyao as the rate was still lower than that demanded by usury businesses, loan application rules and requirement were more relaxed than commercial banks, and the money could be released within three to five days after application.

Yang Qiping, the president of the Pingyao branch of the People's Bank of China, the Chinese central bank, said microfinance firms need to fulfil several requirement.

He said a microfinance firm's initial capital must not be lower than 15 million yuan, and its capital adequacy rate must not be lower than 8%. He added once the rate of non-performing loans exceeded 10%, the company must cease loan giving. In addition, microfinance company must set aside loan loss reserves and establish a risk-guarantee fund.

Though having been in operation for three years, the legal status of microfinance firms remained uncertain, as the China Banking Regulatory Commission (CBRC) was still holding back on issuing them the necessary finance business license for handling loan transactions.

"Our status is rather awkward, the commission neither support nor oppose our existence," said Liu Weihui, owner of Ri Sheng Long, adding his faith in the trade was low due to the lack of official recognition.

The Road to Recognition
After over 30 years of surviving on the margins of China's financial system, community-based financial companies in Wenzhou - the cradle of Chinese private capital in coastal province Zhejiang - embraced the chance to be officially recognized when the government released a guidelines on microfinance companies this May.

Though the central government had generally loosened restrictions for micro creditors, corresponding local policies were still cautious. As the Zhejiang government required, each county could only start one micro credit company during the experimental phase, and the registered capital for such a company should be above 100 million yuan. microfinanceors were only allowed to issue loan within their repective county.

As one of the province's pilot reform cities, Wenzhou enjoyed five extra quotas, which meant it could have altogether 16 microfinance companies as there were 11 counties in Wenzhou.

To Fang Peilin, the owner of the first registered private finance company in China after the Republic was founded, such policies had set a high threshold for local micro-creditors and wasn't in line with the market demand.

As a pioneer in Wenzhou's underground financial system, Fang recalled how private financial organizations developed during the past three decades.

In the early 1980s, Qianku, a town in Wenzhou's Cangnan county, became a base of commodities wholesale market. The rising of manufacturing and trading stimulated local demand for capital and a financial institution called "union" thus evolved.

A union usually had 10 to 20 members who took turns at the helm. At their regular meetings, members should contribute an agreed sum of money and hand it in to the head for his own use. Thus a pool of money rotated amongst these members.

When these small-scaled unions couldn't meet the demand any more, credit lending agents called "yinbei" emerged. In 1984, Fang opened the first private finance company in Qianku. Unlike micro creditors which could only extend loans, these private finance companies provided both loaning and deposit services.

Credit cooperatives were a further progress. The first credit share-cooperative was established in 1986 by eight people with a total funding of 318,000 yuan. In the mid 1990s, urban credit cooperatives were incorporated into the government's banking system and became the first community finance mechanism to win official recognition.