China extends blessing to informal banking network
By Zhou Xin Reuters
Published: November 24, 2008
BEIJING: China is preparing to bring the country's extensive underground banking system in from the cold as part of attempts to bolster lending to small businesses hit hard by the credit crunch and economic downturn.
Informal lending networks, though technically illegal, have been a lifeline for decades for countless businesses too small or precarious to be able to borrow from banks, which typically lend to big state-owned or state-backed firms.
With concern growing about a cash crunch at small and medium-sized enterprises, which account for about three-quarters of all jobs created each year, the government has begun bringing these backstreet moneylenders out of the shadows.
Liu Ping, a researcher with the People's Bank of China, said earlier this month that the central bank had completed the draft of a regulation that would make it legal for individuals to extend loans. And in provinces like Zhejiang, regulators have allowed firms that don't take deposits to start lending to small businesses.
"The government is going to accept what it previously wanted to crack down on, or even get rid of," said Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, the country's top policy institute.
Estimates of the scale of informal banking range widely. Some studies put it at 10 percent to 20 percent of total lending in the economy.
Wu Xiaoling, a lawmaker and a former vice governor at the central bank, said that legalizing the informal market would "give freedom to people who play with their own money." China has been experimenting with non-bank lending for the past three years, especially in the countryside, a priority for policy makers seeking to narrow the gulf between urban and rural incomes.
In 2007, 31 nontraditional financial institutions were established, including 19 village and township banks, according to the China Banking Regulatory Commission. Citigroup won permission last month to set up two lending firms in rural China.
"A banking system that is fit for big cities certainly is not so fit for rural areas," said Zhao Xijun, a finance professor with the China Renmin University in Beijing. "There are blank areas to be filled."
One finance company that opened last month in the rural fringes of Wenzhou, a bastion of private enterprise in eastern China, is Yongjia Ruifeng Small-Sum Loan Holdings.
Pan Xianyong, Ruifeng's general manager, said he had extended about 50 million yuan in loans within a month of opening Oct. 18. The company, which is not allowed to take deposits, expects to have exhausted its initial 150 million yuan in loanable funds within three months.
Pan said that Ruifeng's customers were generally people "who can't get loans from banks. Some of them don't even have a business license."
But he said Ruifeng knew its customers and so was comfortable lending to those with apparently risky profiles. "We know who he is and who his wife is," Pan said.
About 100 firms like Ruifeng have received approval in the past few weeks to start business, according to reports in the Chinese media, including The Beijing Morning Post.
One businessman who had been unable to borrow from established banks is Ye Shengtao, who got a credit line of five million yuan from Ruifeng to run his tea and potato processing firm.
"It's much easier than applying for a loan from a bank," Ye said. "I applied and got the credit in a single day. It makes my life easier." Ye's loan came with a monthly interest rate of 1.5 percent, or more than 18 percent a year.
The authorities are treading carefully to control the new finance companies' risks. In Zhejiang, where Wenzhou is located, these companies must register capital of at least 50 million yuan.
The maximum interest they can charge is four times the benchmark rates set by the central bank, currently 6.66 percent for one-year loans, and 70 percent of the loans they extend must be less than 500,000 yuan.
Zhao, the Renmin professor, said the risks were not necessarily greater than those taken by big banks. "Just look at what happened to the well-established banks on Wall Street," he said.
By Zhou Xin Reuters
Published: November 24, 2008
BEIJING: China is preparing to bring the country's extensive underground banking system in from the cold as part of attempts to bolster lending to small businesses hit hard by the credit crunch and economic downturn.
Informal lending networks, though technically illegal, have been a lifeline for decades for countless businesses too small or precarious to be able to borrow from banks, which typically lend to big state-owned or state-backed firms.
With concern growing about a cash crunch at small and medium-sized enterprises, which account for about three-quarters of all jobs created each year, the government has begun bringing these backstreet moneylenders out of the shadows.
Liu Ping, a researcher with the People's Bank of China, said earlier this month that the central bank had completed the draft of a regulation that would make it legal for individuals to extend loans. And in provinces like Zhejiang, regulators have allowed firms that don't take deposits to start lending to small businesses.
"The government is going to accept what it previously wanted to crack down on, or even get rid of," said Yuan Gangming, a researcher with the Chinese Academy of Social Sciences, the country's top policy institute.
Estimates of the scale of informal banking range widely. Some studies put it at 10 percent to 20 percent of total lending in the economy.
Wu Xiaoling, a lawmaker and a former vice governor at the central bank, said that legalizing the informal market would "give freedom to people who play with their own money." China has been experimenting with non-bank lending for the past three years, especially in the countryside, a priority for policy makers seeking to narrow the gulf between urban and rural incomes.
In 2007, 31 nontraditional financial institutions were established, including 19 village and township banks, according to the China Banking Regulatory Commission. Citigroup won permission last month to set up two lending firms in rural China.
"A banking system that is fit for big cities certainly is not so fit for rural areas," said Zhao Xijun, a finance professor with the China Renmin University in Beijing. "There are blank areas to be filled."
One finance company that opened last month in the rural fringes of Wenzhou, a bastion of private enterprise in eastern China, is Yongjia Ruifeng Small-Sum Loan Holdings.
Pan Xianyong, Ruifeng's general manager, said he had extended about 50 million yuan in loans within a month of opening Oct. 18. The company, which is not allowed to take deposits, expects to have exhausted its initial 150 million yuan in loanable funds within three months.
Pan said that Ruifeng's customers were generally people "who can't get loans from banks. Some of them don't even have a business license."
But he said Ruifeng knew its customers and so was comfortable lending to those with apparently risky profiles. "We know who he is and who his wife is," Pan said.
About 100 firms like Ruifeng have received approval in the past few weeks to start business, according to reports in the Chinese media, including The Beijing Morning Post.
One businessman who had been unable to borrow from established banks is Ye Shengtao, who got a credit line of five million yuan from Ruifeng to run his tea and potato processing firm.
"It's much easier than applying for a loan from a bank," Ye said. "I applied and got the credit in a single day. It makes my life easier." Ye's loan came with a monthly interest rate of 1.5 percent, or more than 18 percent a year.
The authorities are treading carefully to control the new finance companies' risks. In Zhejiang, where Wenzhou is located, these companies must register capital of at least 50 million yuan.
The maximum interest they can charge is four times the benchmark rates set by the central bank, currently 6.66 percent for one-year loans, and 70 percent of the loans they extend must be less than 500,000 yuan.
Zhao, the Renmin professor, said the risks were not necessarily greater than those taken by big banks. "Just look at what happened to the well-established banks on Wall Street," he said.
