Thursday, April 06, 2006

[Microcredit] Cradle of Chinese banking gives birth to new scheme

from Rueters

By Alan Wheatley, China Economics Editor

PINGYAO, China (Reuters) - Sheep farmer Wang Jincan is at the heart of a little experiment with potentially big consequences for the Chinese banking system.

Wang is talking to a loan officer hoping to borrow 40,000 yuan ($5,000) to buy 500 sheep to add to the flock of 300 he keeps about 30 km (20 miles) from this ancient walled town in northern Shanxi province.

The scene is played out not at one of China's Big Four state banks or the local rural credit cooperative, which rarely lend to people like Wang in any case, but in the smart, modern offices of Rishenglong Small Credit Co., a private microcredit company.

"This is very important to me, very important. I live in the mountains, and it's not easy up there. This will help me to develop my business," said Wang, a chain-smoking 50-year-old.

Pingyao is one of 20 areas in four provinces chosen for a pilot scheme in microcredit, which has transformed the lives of millions of peasants across the globe, notably in Bangladesh, but has been kept on a short leash in China.

The political backdrop to the experiment is the imperative of mobilizing rural finance to support the ruling Communist Party's goal of closing the yawning income gap between town and country.

Under pressure to clean up their books, state banks retreated from risky rural lending long ago, using peasants' deposits instead to finance the growth of China's industries and cities.

GOING UNDERGROUND

Pingyao's banks, for instance, had 2.5 billion yuan in deposits in 2004 but only 1.2 billion yuan of loans on their books, according to Kong Xiangyi, a professor at Shanxi University of Finance and Economics.

With credit tight, peasants have had to turn to illegal lenders for perhaps 50 percent or more of their borrowing.

Wang says he has paid interest of close to 50 percent for underground loans. Official surveys estimate 950 billion yuan of such back-alley loans are outstanding nationwide, equal to 5.2 percent of annual gross domestic product.

"Only by making financing more accessible to people and lowering the barriers to carrying out legal financing activities can we address illegal activities at their root," Wu Xiaoling, a deputy governor of the People's Bank of China, said last week.

"Allowing individuals or specified companies to use their own capital to carry out small-scale loans is a realistic option to guiding private financing in a more reasonable direction," she said.

This is what is happening in Pingyao. Rishenglong and another microcredit firm authorized by the county government, Jingyuantai Small Credit Co. Ltd., are barred from accepting deposits.

Instead they lend out the capital of their shareholders -- 17 million yuan from three investors in the case of Rishenglong and 16 million yuan from four people who are behind Jingyuantai.

Jingyuantai's chairman, Han Shigong, who made his money from coal, is bullish about the firm's prospects, given Beijing's support and the priority it is attaching to rural development.

"Many entrepreneurs have accumulated some wealth after 26 years of economic reforms and they want to put their capital to better use," Han said. "Foreign banks are about to gain wider access to our market, so why can't we Chinese do banking as well?"

OLD TRADITION

Han is proud to be following in the footsteps of Pingyao's 19th century credit houses, or piaohao, which established branches as far afield as Japan and Russia, earning the city the reputation as the cradle of modern Chinese banking.

One of the investors in Rishenglong is a descendant of the founder of the first piaohao, Rishengchang, whose 100-room headquarters is now a museum testifying to the past glories of Shanxi banking.

Could the microcredit firms earn similar renown?

"This step, if successful, may lead to a fundamental change in China's economy and credit market," Citigroup economist Yiping Huang wrote in a recent report. "Improved credit access should contribute to a boom of small and medium enterprises in China."

Microlenders must make 75 percent of their loans to farmers. In return they may charge up to four times the official benchmark rate of 5.58 percent for one-year loans.

Since it opened in February, Jingyuantai has already lent 4.6 million yuan to 61 households to buy farming equipment, feed and livestock. Borrowers pay interest of 18.6 percent, Han said.

Rishenglong charges farmers 16.2 percent and other borrowers 18 percent, according to its loan officer, Zhang Haiqing. It has so far lent 1 million yuan for things like seeds and fertilizer.

But Kong, the finance professor, has his doubts whether the microcredit firms will flourish in their present form, let alone become fully fledged deposit-taking banks as their owners hope.

He said the various parties' goals are tough to reconcile.

While the government sees the microcredit firms serving more or less a welfare function, their investors want to make as much money as they can -- which means charging interest rates that may prove to be too high for peasants like Wang, the sheep farmer.

"It's questionable whether their businesses will be profitable enough to enable them to repay the loans," Kong said.

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