Access to Finance Microfinance Innovations in the People’s Republic of

The People’s Republic of China (PRC) has adopted a more market-oriented approach by promoting rural microfinance, pursuing bottom-up innovations such as group lending, various forms of guarantees, new financial products based on purchase orders and policies, and better incentives for agriculture funding from financial institutions. In 2009, the PRC sought the assistance of the Asian Development Bank to study how to optimize policy choices in rural finance using both top-down and bottom-up approaches. This report presents the findings of that rural microfinance study, including valuable lessons learned from several pilot microlending programs conducted in selected provinces in the PRC. It then analyzes outstanding issues in the country’s rural and microfinance markets that need to be addressed more vigorously.

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ACCESS TO FINANCE MICROFINANCE INNOVATIONS IN THE PEOPLE’S REPUBLIC OF CHINA

ASIAN DEVELOPMENT BANK 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines ASIAN DEVELOPMENT BANK www.adb.org

ACCESS TO FINANCE MICROFINANCE INNOVATIONS IN THE PEOPLE’S REPUBLIC OF CHINA

ASIAN DEVELOPMENT BANK © 2014 Asian Development Bank

All rights reserved. Published in 2014. Printed in the Philippines.

ISBN 978-92-9254-857-5 (Print) 978-92-9254-858-2 (PDF) Publication Stock No. RPT135633-2

Cataloging-in-Publication Data

Asian Development Bank. Access to finance: Microfinance innovations in the People’s Republic of China. Mandaluyong City, Philippines: Asian Development Bank, 2014.

1. People’s Republic of China. 2. Microfinance. 3. Finance. I. Asian Development Bank.

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Tables and Figures v Foreword vi Acknowledgments vii Abbreviations viii Rural Financial Innovation in the People’s Republic of China 1 Rural Financial Reform 1 Pre-reform Rural Financial Markets and Rural Financial Institutions 2 Reforms Since 2005 and Their Outcomes 3 Unresolved Issues 6 Rural Financial Regulation and Supervision 8 Introduction 8 Rural Financial Markets 9 Urgent Need for Improving Financial Supervision in the Rural Areas 11 Factors that Impede Supervision 12 Recent Efforts to Introduce Innovations in Rural Financial Regulation and Supervision 13 Issues Needing Further Study 15 MSE Finance 17 Introduction 16 Micro and Small Enterprise Financing in the PRC 19 Causes of SME Financing Difficulties and Possible Solutions 22 Relationship Lending 24 Bank Lending Techniques 25 Bank Organization for Small-Enterprise Financing 27 Two Business Models for Small-Enterprise Financing 28 Findings of the Field Survey 31 Pilot Implementation of the IPC Model in the PRC 32 Conclusions 40 Financing the Agricultural Value Chain 42 Introduction 42 Chanyehua and Financial Support 44 Cooperative Financing 49 Agricultural Value Chain Financing 55 Problems for Further Study 61 NGO Microfinance: The Case of CFPA Microfinance 63 Development of CFPA Microfinance 63 Management of CFPA Microfinance 65 Loan Products and Processing 69 Management of Loan Officers 75

iii iv Contents

Staff Training 75 Analysis and Conclusions 76 Recommendations 78 Village Development Mutual Aid Funds: The Case of 81 Introduction 81 Field Surveys and the Implementation of the Village Development Mutual Aid Fund Pilot Projects 85 Poverty Targeting 91 Sustainability 95 Conclusions and Recommendations 98 Lessons and Future Directions 100 Summary 100 Policy Recommendations for Further Reforms 101 Lessons 107 References 109 Tables and Figures

Tables 1 Regulated Rural and Microfinance Institutions in the PRC, as at the end of 2012 4 2 Performance of RCCs and New RFIs in the PRC 2010–2011 4 3 The Total Loan Portfolio and Nonperforming Loans for Commercial Banks in (2010–2012) 4 4 The Development of Nonbanking Microloan Institutions in the PRC 2012 5 5 The Classification of Enterprises in the PRC, by Industry 20 6 World Bank Definition of Micro, Small and Medium-Sized Enterprises 20 7 A Summary of Surveys on Demand, Channels and Loan Conditions 20 8 Comparison between Hard Information and Soft Information 25 9 Comparison of Loan Technique Classification of Western Banks 26 10 Major Events with Project Implementation 33 11 Project Results as Compared to Targets 2006–2010 34 12 Breakeven Months Required for Partner Financial Institutions 35 13 The Lending Interest Rates and Cost Structure for Microloans by the 6 Partner Financial Institutions (Unit: percentage of the loan portfolio) 35 14 Branch Loan Products (Business Loan and Housing Loan) 71 15 Individual Loan Approval and Disbursement Processes 72 16 Basic Data on the Four Villages Surveyed 86 17 Number of Persons Interviewed in the Four Villages 86 18 Details of Village Meetings in the Four Villages Surveyed 88 19 Management Committee Structure in the Four Villages Surveyed 89 20 Provisions of Management Charters of the Four Villages Surveyed 90 21 Status of Village Development Mutual Aid Funds in the Four Villages Surveyed 91 22 Loan Applications and Approvals in the Four Villages Surveyed 92 23 Cropping Input and Output in the Four Villages Surveyed 93 24 Livestock-Raising Input and Output in the Four Villages Surveyed 93 25 Three Major Nongovernment Microcredit Programs in the PRC 94

Figures 1 Organizational Chart of CFPA Mirofinance 66 2 Authority Structure of the Village Development Mutual Aid Fund 88

v Foreword

rom the early 1990s to 2005, the People’s Republic of China (PRC) used a top–down approach to rural finance and microfinance reform and development. The top level F policy issues were largely the focus and market issues at the micro level received little attention. This approach could not have sustainable results. Since 2005, the government has therefore taken a more market-oriented approach and promoted