China Law Blog

I have no idea what microlending is but I'll be sure to read about it soon. Havin said that I'll still go and comment on the subject :)

If there is something to microlending, that the government through some SOE can do themselves, they will do it soon enough after they get how to do it. IF the issue is, as you write it "Chinese peasants believing entities other than the Chinese governmen". I'm sure the government has the best in heart for the peasant, for whatever reason. They are not doing this just for this petty reason. Please, it even sounds silly. Loss of control can be greater from peasants with no food, would you not agree? One thing to keep in mind, though: how many graduated from universities compared to last year? How many of these have absolutely no chance of finding work? What will happen if peasants will have money in their masses to start their own business? How will the manufacturing revolution be fueled then? Someone has to do it...

I don't think you use guys are giving the government here much credit. I'd raise the rating much higher.

Jonathan --

I completely agree that Beijing wants to see the peasants fed and not rioting. But, I also think that the government, particularly the local party hacks, are afraid of the competition that small private businesses can bring to bear. I do not think the government is against microlending, per se, but I do think the government does not like the idea of non-government owned banks or agencies controlling too much of the funding purse strings.

You may find http://www.venturesindev.org of some interest. Perhaps this is more "micro VC," than microfinance, but its nonetheless a good example of for-profit lending to small businesses in Yunnan, China. This model does not seem to be similarly hindered by the inability to take deposits.

There's actually a very active system of informal credit in China, much of it government sponsored.

http://www.amazon.com/Back-Alley-Banking-Private-Entreprenuers-China/dp/0801489172

The fact that the state owned banks don't lend very much isn't significant since for most of the 1990's, China had a "dual economy" with state banks/SOE in one sector and a separate informal credit/private enterprise in another sector.

The trouble with microcredit like any other credit is that you can get a major disaster if you do it wrong. There is a bad case in South Africa where microcredit lenders ended up losing billions of dollars. Also, much of the reason that the government is skitish about extending too much credit to the countryside is that the rural credit cooperatives are broke, and there were some major problems with local lending in the 1990's.

Dear Dan,

Thank you for this excellent resource. Microfinance may or may not be officially sanctioned, however a quick search of the Chinese term (????)yields roughly 300,000 results on Baidu.com, and so it has certainly garnered interest in the Chinese-speaking community. While I've been unable to locate a Chinese version of the China Daily article mentioned above, I have come across a number of other articles, the most recent of which was posted on Sohu.com and discusses Professor Yunus's October visit to Beijing. Professor Yunus is said to have placed much of the blame for microfinance's difficulties in China on the "credit without savings" fundamental now holding court on the Mainland. According to his stats, only 100,000 persons in China currently have access to microfinancing. I suppose one can look at this through the glass-half-full prism (it's a start), but in the face of such massive demand, there needs to be a bit more "will" to complement this obvious "way". P.S. If you're interested in learning more about rural credit in China, you might check out "Back-alley Banking" by Professor Kellee Tsai of Johns Hopkins. Its a few years old but certainly as relevant today as it was in 2003. Cheers.

"but I do think the government does not like the idea of non-government owned banks or agencies controllign too much of the funding purse strings."

There are plenty of economies in the world where the government does the same and even more. Including Europe. And it's not because ""Chinese peasants believing entities other than... "" or anything like it. Common, it's just silly.

I'm afraid I can't remember where I read it, but I recall an article recently on an NGO's experience in microfinance in China, which had not been terribly positive. In addition to the problems mentioned above it was apparently very difficult to instill the idea that the loans had to be repaid (too many years of the state banking system perhaps?). The group also found that there were too many other competing institutions providing financing that were able to lend at lower rates and on easier terms, which suggests both that the rationale for microfinance is less strong than in places like India where money lenders dominated, and also that improvements in China's banking system's risk management have some way to go before they hit the countryside.

Sean --

Thanks for checking in and thanks for referring us to Ventures in Development. I actually spent some time reading the site and going to the blog and I left quite impressed. My firm is actually doing quite a bit of legal work these days in Mongolia (co-blogger Steve Dickinson is been on a Shanghai/UB shuttle of late) and yet I had no idea so much could be done with the Yak.

Do you have any ties to ViD? It certainly looks like an impressive group. It appears to me that it got its initial funding as a US charity, but I am wondering if it intends to become self-sustaining. Has it achieved that yet? Certainly an interesting idea, but can it work on a larger scale?

Mr. Wang --

Thanks for checking in and thanks for referring to Back Alley Banking. I have yet to read that book, but countless people whom I respect have touted it as essential.

Yes, China has a well established system of informal lending, but no, that is not as good as a formal one.

I am far from expert in microlending, but it is my understanding that, done right, there is virtually no possibility of a crash. This is because the loans are given out in such small amounts and not increased until the borrower is shown to be credit-worthy. I know nothing about what happened in South Africa, but I know that in many places, the payback rate approaches 100%. Of course microlending is not THE solution to China's rural poverty, but it deserves an opportunity.

Shu Jierui --

Thanks for checking in and thanks for passing on your research. I have heard nothing but good things about "Back Alley Banking," including that it is as relevant today as when it was written. I do plan to read it some day. Maybe on my next Asia trip as inflight internet will be ending very soon.

Jonathan --

Thanks for checking in. I am not sure to what you are referring when you say there are other governments that do the same and even more. I will say that to the extent a government blocks its people from securing loans (and I am not talking about anti-usury regulations, etc.) it is taking power from its people and asserting its own power. It cannot be otherwise. We can argue whether it is justified or not, but we cannot deny it is happening.

Duncan --

Thanks for checking in. I am not familiar with the article you are discussing, but I would love to see it. Readers?

The Amity Foundation is a Chinese NGO that has experimented with microlending. This from their website:
... micro loans given to families living with HIV/AIDS

http://www.amityfoundation.org/page.php?page=10

> Yes, China has a well established system of informal lending, but no, that is not as good as a formal one.

Why?

The answers that I can think of are situational and involve the cost and terms of lending, official sanction, availablity of conflict resolution etc. etc.

However, those imply certain facts about the system in place that need to be established before using them.

In looking at street-level finance, my general impression is that China discovered microcredit before someone coined the term, and that's why the economy has been expanding since 1978.

Kevin S --

Thanks for checking in. I checked out Amity and it does mention microlending, but it is unclear the extent of that program and it certainly does not seem to be its focus.

Mr. Wang --

The problem with informal lending is that it makes no aspirations to be based on merit so much as being based on who you know. The other problem is that interest rates tend to be much higher. I am not saying formal lending in China is anywhere close to the ideal or will be anywhere close for years to come, but it has a better chance of getting there eventually.

>Do you have any ties to ViD? It certainly looks like an impressive group. It appears to me that it got its initial funding as a US charity, but I am wondering if it intends to become self-sustaining. Has it achieved that yet? Certainly an interesting idea, but can it work on a larger scale?

ViD is run by a friend of a friend, some of whom I have had the pleasure of meeting, but I do not have any direct ties to them other than also being impressed with their operations. My understanding is that although they are a non-profit, the lending is geared towards for-profit ventures. Can it work on a larger scale? I wouldn't dare venture a guess, but I will certainly continue to watch their progress!

Sean --

Thanks for checking back in. I too will be watching their progress, on their site and blog.

From the sound of things, a microcredit program might be used to satisfy the Community Reinvestment Act (CRA) requirements of U.S. banking regulations. I was wondering if Chinese banking law had similar requirements.

Thinking about things further, it dawned on me that the U.S. banking system is probably one-of-a-kind in the world due to its history and the myriad of regulatory regimes to which it is subject.

The U.S. never developed a uniform, centralized system of banking like the British system, although the Federalists really wanted to model our system along British lines. The hostility toward a central system of banking from Jefferson and later Andrew Jackson to others on down the line ensured tension between the varied state systems and a national system in U.S. banking history. As a result of this history, the banking industry is one of the most heavily regulated industries in our country. It would seem that other countries would probably shy away from a U.S. type system.

U.S. banking is based on a chartering system. Once a bank obtains a charter it can enter into the lucrative business of banking. Being entrusted with the public's deposits is not the only benefit the banker receives. Banks are also entitled to a generous subsidy in the form federal deposit insurance, which helps reduce risk.

In exchange for a charter, a U.S. banker is subject to very limiting regulations as to capital risk, among other things. The banker must demonstrate that he and his fellow organizers have the requisite experience, have raised ample capital, have a sound business plan, and a plan to re-invest in the community.

That was probably a bit more of a wind-up than is necessary, but I wanted to know whether other systems have CRA-type requirements. Or are other systems different due to the fact that they are more centrally-run?

Joel Stark (I) --

Thanks for checking in. I have never heard of such a requirement and I really doubt it exists. To grossly summarize and oversimplify Chinese banking, it is lend to the government company with the powerful bureaucrats. But, maybe with all the talk of pushing more to the rural areas, this may change, but I doubt it.

Joel Stark (ii) --

Thanks for checking back in. My knowledge of the banking systems in China and the United States is actually fairly limited and my knowledge of the banking systems of most other countries is even less. I do not know enough to answer your questions.

PS -- See you are at University of Iowa. Iowa City is one of my favorite places.

I just finished a course on banking regulation at Iowa Law, where I'm a 3L, so banking must be on my mind. There's a great book on the subject by Kenneth Spong - Banking Regulation: Its Purposes, Implimentation and Effects - which is available free online at:

http://www.kc.frb.org/BS&S/publicat/PDF/RegsBook2000.pdf

Mr. Stark --

Thanks for checking back in and thanks for the banking rec. I will be sure to read it -- in my next life. Just kidding, but I have to admit I have no plans to switch to banking law. Not that there is anything wrong with that....

It will be interesting to see if the government will find that their desire for control is outmatched by the opportunity to fund the grassroots without spending government money.

Obviously there are huge barriers to microlending but it seems like microlending could represent a powerful infusion of cash [assuming external funding] given the enormous numbers of people who would potentially qualify for such loans.

Small is the new big?

Clyde --

Small is the new big. The problem here though is that in addition to not wanting to give up power, the government also wants (at least on one level) to cool the economy a bit. But, the beauty of microlending is that it ought to reach into the very regions of China that really need growth. I think you have hit the tensions right on the head and it will be interesting to see how they are resolved.