CHINA

Country Overview

August 2008

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1. Executive Summary 3 2. Country brief 4 SUMMARY 4 INDICATORS ON NATIONAL ECONOMIC AND SOCIAL DEVELOPMENT 5 2. Financial Sector 8 GENERAL FINANCIAL SECTOR OUTREACH 8 FINANCIAL SERVICES PROVIDERS 8 MICROFINANCE SERVICES PROVIDERS 11 FINANCIAL SECTOR’S BACKERS AND MARKET FACILITATORS 15 3. Notes on the Insurance industry 16 INSURANCE PROVIDERS 16 MICROINSURANCE 16 4. Investment conditions & regulations 17 INVESTMENT PROCESS 18 Appendix 1 – Country MFI list 20 Appendix 2 – Investors and Donors in Microfinance 27 Appendix 3 - Rules and regulations 28 Appendix 4 - Contacts and extra information 34

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1. Executive Summary

z The Chinese government has lifted approximately 400 million people out of poverty in the past 25 years through encouragement of economic development. In the first 25-year phase of development, these efforts were mainly directed at Eastern and Southern China. z The income gap has been widening as wealth grows in selected areas. As the seaboard areas accumulate ever greater wealth, China’s poor are becoming more concentrated in the west, in regions which have been traditionally difficult to access. However, as costs of operation rise on the seaboard, entrepreneurs are beginning to look to Western and Central China to invest where costs are lower, taking advantage of transport and communications infrastructure laid down in the past five years. z At least 228 million rural inhabitants are unable to obtain financial services, and the challenge of addressing this problem is firmly on the agenda of the national “San Nong” program to improve agricultural practices, the lives of the farmers, and the quality of life in the village. z The Chinese traditional culture of high savings gives the market tremendous potential amounts of deposits, but these are waiting to be mobilized by regulated financial institutions who are not engaging in small loans business to any marked degree. z Progress in the development of efficient microfinance has been slow and spotty in China over the past 20 years, relative to the kind of progress seen in India and Bangladesh, or relative to the demand in the market, so it is still early days for the MF industry: „ Microfinance organizations’ legal status is either unclear or prevents them from expanding their funding; most of the smaller organizations (with around 3,000 clients) were set up in the late 1990s by international agencies such as UNDP, UNICEF, etc. Many of these operations are now administered under government project offices and are independent of the original agencies. Many of these organizations have ambitions to clarify their legal status and become eligible for investment or financing. „ Commercial microcredit institutions, set up as limited liability companies, are able to provide credits but are unable to accept deposits, so these are reliant on replenishment through outside financing or investment on a scale that can sustain growth in this credit-hungry market. In the currently rather over-liquid conditions of China’s economy, the government and the State Administration are loath to allow local regions to register additional foreign debt. „ Regulatory constraints and significant barriers to entry into the small loan market mean that most existing microfinance organizations will need to transform themselves into regulated financial institutions sooner or later; such a mechanism for transformation has existed since 2006 under the China Banking Regulatory Commission. „ It could also well transpire that these experienced small organizations will ally themselves to work alongside banks with a regulated organization; such new partners could be banks willing to move into the countryside and into the smaller- loan market, some of the better-managed rural credit cooperatives, or the Postal Savings .

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2. Country brief

SUMMARY

China is the oldest continuous major world civilization, with the earliest settlements dating back to about 5,000 B.C. in the Yellow River basin. The country’s early development was based on agricultural, nomadic, and hill cultures. China’s first advanced civilization began during the Shang Dynasty in 1500-1000 B.C., with the introduction of the ideographic writing system. However, the country did not unite until 200 B.C., when Emperor Ch’in Shih Huang Ti began construction of the Great Wall of China against invasions. This isolated China from other civilizations until the Anglo- Chinese War in 1839 when Western colonial influences began building trading ports in Kong.1 The Confucian ideology has been predominant throughout Chinese history, preaching obedience under authority and hard work. The only official language, Mandarin, is adopted all over the country.

For centuries China was seen as a leading civilization, outpacing the rest of the world in the arts and sciences. However in the 19th and early 20th centuries, China was beset by civil unrest, major famines, military defeats, and foreign occupation. After World War II, China was unified under the Communists (led by Mao Zedong) and was brought under tight central control, closed to most outside influences. In 1978, one of Mao Zedong’s later successors, DENG Xiaoping, gradually introduced market-oriented reforms and decentralized economic decision making. China is now seen as a major player in international relations; economic controls continue to be relaxed and yet political controls remain tight. Growing disparity between rich and poor within the country threatens the most important political agenda: economic growth with social stability.

1 http://www.worldvision.org/about_us.nsf/child/aboutus_china?Open#today

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INDICATORS ON NATIONAL ECONOMIC AND SOCIAL DEVELOPMENT

Item 1978 1990 2000 2006 Population and Employment Birth Rate (%) 18.25 21.06 14.03 12.09 Death Rate (%) 6.25 6.67 6.45 6.81 Natural Growth Rate (%) 12.00 14.39 7.58 5.28 Registered Unemployment Rate in Urban Areas (%) 5.3 2.5 3.1 4.1 National Accounting Per Capita GDP (RMB) 381 1644 7858 16084 Government Finance Proportion of Government Revenue to GDP (%) 31.1 15.7 13.5 18.4 Proportion of Government Expenditures to GDP (%) 30.8 16.5 16.0 19.2 Utilization of Foreign Capital Proportion of Foreign Direct Investments Actually Utilized to Contracted FDI (%) 52.9 65.3 34.7 Construction Value of Machinery per Laborer (RMB/person) 2467 6304 9109 Ratio of Pre-tax Profits to Gross Output Value (%) 4.4 4.6 6.2 Overall Labor Productivity (RMB/person) (in terms of value-added per employee) 15929 25741 Transportation Railway Density (km/10000 sq.km) 53.9 60.2 71.6 80.3 Highway Density (km/10000 sq.km) 927 1071 1461 3601 Domestic Trade Per Capita Retail Sales of Consumer Goods () 163 731 3097 5828 Foreign Trade Proportion of Total Value of Imports & Exports to GDP (%) 9.7 29.8 39.6 66.9 Financial Intermediation Bank Deposits as Percentage of GDP (%) 31.1 75.1 124.8 159.1 Bank Loans as Percentage of GDP (%) 50.8 94.7 100.2 106.9 Proportion of Cash Outlay to Cash Receipt in Bank (%) 101.2 101.7 100.4 100.4 Education Rate of Graduates of Senior Secondary Schools 27.3 73.2 75.1 Schools Entering Senior Secondary Schools (%) 40.9 40.6 51.2 75.7 Entering Junior Secondary Schools (%) 87.7 74.6 94.9 100.0 Rate of School-age Children Enrollment (%) 95.5 97.8 99.1 99.3 Science and Technology R&D Expenditures as Percentage of GDP (%) 0.90 1.42 Health Care Number of Certified (Assistant) Doctors per 10 000 Population (person) 10.8 15.6 16.8 15.4 Number of Hospital Beds per 10 000 Population (bed) 19.3 23.2 23.8 25.3 Beds Utilization Rate of Medical Institutions (%) 80.9 60.8 64.9 Municipal Works Percentage of Population with Access to Tap Water (%) 48.0 63.9 86.7 Percentage of City Population with Access to Gas (%) 19.1 45.4 79.1 Per Capita Public Green Areas (sq.m) 1.8 3.7 8.3

I. Economy

China's economy during the last quarter century has transformed from a centrally planned system that was largely closed to international trade to a more market-oriented economy with a rapidly growing private sector, recently becoming a major player globally. The average annual GDP growth rate since the 1978 reform has been 9.8% (GDP growth rate was 11.4% in 2007 and 10.6% in the first quarter of 2008). The government’s priority this year is to both maintain a steady growth rate in order to continue creating job opportunities, while on the other hand controlling the soaring inflation (an annual rate of 7.1% in 2007 and 8.3% in the first quarter 2008). Concurrently with its high inflation rates, the value of the Chinese currency, the RMB has been skyrocketing since China revalued its currency in July 2005 moved to an exchange rate system that references a basket of currencies. Cumulative appreciation of

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the RMB against the US dollar since the end of the dollar peg reached 15% in January 2008 (At the time of compiling this information, the rate was hovering around RMB6.97 to USD 1).

Growth in China is highly dependent on exports and export-related investment (external trade accounted for 66.9% of GDP in 2006). Since the early 1990s, China has allowed foreign investors to manufacture and sell a wide range of goods on the domestic market, and authorized the establishment of wholly foreign-owned enterprises, now the preferred form of FDI. However, the Chinese government's emphasis on guiding FDI into manufacturing has led to market saturation in some industries, while leaving China's services sectors underdeveloped. China is now one of the leading FDI recipients in the world, receiving over $80 billion in 2007 according to the Chinese Ministry of Commerce. The Chinese government is anxious to bring more institutional investment into the Chinese stock markets. It approved Qualified Foreign Institutional Investors (QFII) in 2007 to start allowing investors qualified by the State Administration of Foreign Exchange to invest in China’s “A” shares on China’s stock markets. (Until 2003, only the much rarer ”B” shares could be traded by foreign companies.) Major remaining barriers to foreign investment include opaque, inconsistently enforced laws and regulations and the lack of a rules-based legal infrastructure.

Rapid economic expansion has had a disastrous impact on the environment in China. Global warming and pollution are huge and complex problems that China is beginning to acknowledge ownership of, though change is just beginning. The climate, which used to be extreme in its differences north/south/east and west, is becoming even more extreme to the point where some people, for instance those living in the semi-desert of northwest China, may have to be moved. As a result there have been increasing numbers of natural disasters, creeping desertification, uncontrollable viruses, possible problems from Three Gorges Dam. Water is a huge problem, with at least 50% of all water in China is too polluted for use by humans. In light of this, China is committing itself visibly to the promotion of renewable energy.

II. Politics

The Chinese Government is subordinate to the (CCP); its role is to implement party policies. The primary organs of state power are the National People's Congress (NPC), the State Council and the President (the head of state).

In all important governmental, economic and cultural institutions in China, party committees work to see that party and state policy guidance is followed and that non-party members do not create autonomous organizations that could challenge party rule.

III. Development Overview

Measured on a purchasing power parity (PPP) basis, China, in 2007, stood as the second- largest economy in the world after the USA. However, in per capita terms, the country is still lower middle-income. More than 128 million Chinese, many in remote and resource-poor areas in the western and interior regions, still have consumption levels below a dollar per day, often without access to clean water, arable land, or adequate health and education services. The rate of poverty reduction has fallen since the mid- 1990s, as the country seeks to assist the poor concentrated in geographically disadvantaged regions and new challenges such as the emergence of urban poverty.

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China’s 11th Five Year Plan (2006-2010) forms the basis for the Government's current economic and social development efforts. In continuity with the 10th Five Year Plan, the 11th Plan aims to sustain the rapid and steady development of China's "" while achieving the "five balances" (between rural and urban development, interior and coastal development, economic and social development, people and nature, and domestic and international development) and making economic and social development more people-oriented, comprehensive, balanced and sustainable. The next 5 years represent a critical period in China's development. To investors, China currently represents a vast market that is still somewhat untapped and a low-cost base for export-oriented production.

The Chinese government faces several development challenges: sustaining adequate job growth for tens of millions of workers laid off from state-owned enterprises, migrants, and new entrants to the work force; implementing a real social welfare system to cope with the growing class inequalities; to reduce corruption and other economic crimes; to restrain environmental damage and social strife related to the economy's rapid transformation; to rebalance China’s pattern of growth and increase the capacity for independent innovation; and to create a reliable legal framework.

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3. Financial Sector

GENERAL FINANCIAL SECTOR OUTREACH

The Chinese financial sector has historically been developed through the government, resulting in poor risk management systems, internal controls, and governance. Due to this, Chinese financial institutions have had very high non-performing loan rates. In addition to establishing better monitoring and regulations for financial institutions to decrease non-performing loans, the government is focused on developing rural China in order to fight income disparities, with institutions at every level supporting microfinance programs.

Table 2.1 Nbr of financial institutions (1) 8,877 Outstanding amount of loans portfolio(1) 49.6 trillion RMB Outstanding amount of savings/deposits(1) 40.1 trillion RMB Nbr of rural households with access to financial services(2) 82 million % of rural households without any access to financial services(2) 64% Nbr of counties or villages with no financial institutions(3) 2,868 (2,645 in West) Outstanding amount of informal money loans(4) 7 trillion RMB (1) CBRC 2007 Annual Report (2) Low Income Households, Asian Development Bank, http://www.adb.org/Documents/Books/Low-Income- Households/chap3.pdf (3) “China Urges Financial Institutions to Extend Service in Rural Areas,” http://www.bjreview.com.cn/headline/txt/2008- 07/21/content_134777.htm, July 2008 (4): Farrell, Diana and Susan Lund, “Putting China’s Capital to Work,”Mckinsey, May 1, 2006, http://www.mckinsey.com/mgi/mginews/chinacapital.asp

FINANCIAL SERVICES PROVIDERS

There are five main types of banks in China: wholly state-owned banks, the postal savings bank, commercial banks, foreign banks, and credit co-operatives. In addition to the core four financial institutions, there are also non-bank financial institutions.

1. Wholly state-owned banks include policy banks and state-owned commercial banks. ƒ State-owned commercial banks: There are four state-owned commercial banks, commonly referred to as the "big four". 1) Agricultural Bank of China (ABC) was established in 1979, headquartered in Beijing. The ABC has service outlets and an electronic banking network reaching every county seat in China. The ABC has a special credit unit dedicated to giving micro-entreprise credit in pilot regions.1 2) Bank of China (BOC), is mainly engaged in commercial banking, including corporate and retail banking, treasury business and financial institutions banking. 3) (CCB), specializes in medium to long-term credit for long term specialized projects, such as infrastructure projects and urban housing development.2 4) Industrial & Commercial Bank of China (ICBC), has a special credit unit dedicated to giving micro-entreprise credit in pilot regions. ƒ Policy banks: The government established three policy banks in 1994 which currently play a key role in the development of the rural sector.They are: 1) Agricultural Development Bank of China is mandated by the CBRC as the key to providing policy-related financial services for agriculture, rural areas, and farmers (called the SanNong)3 2) is charged by the CBRC with exploring new ways to deliver financial services to the SanNong. 1

1 “Create a Favorable Social Environment for the Development of Micro-Credit Business,” speech by Wu Xiaoling, March 2006. 2 http://www.buyusa.gov/china/en/financial_services.html 3 “Vice Chairman JIANG Dingzhi’ speech at the 2007 China Rural Financial Forum,” December 7, 2007, http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2007122099ADA94986A6C0E5FF0E30C1D63CA700

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3) Export-Import Bank of China is responsible for supporting agricultural businesses to “go global” under the guidance of the CBRC. 2 Table 2.2 In billions of RMB Total Assets by financial institution Total Liabilities by financial institution

3.3% 2.3% 3.5% 1.6% 2.4% 1.8% 6.3% 6.5% 7.8% 8.1%

52.5% 10.5% 53.7% 12.4%

13.7% 13.7%

State-ow ned commercial banks Joint-stock commercial banks State-ow ned commercial banks Joint-stock commercial banks Rural financial institutions(a) Policy Banks Rural financial institutions(a) Policy banks City commercial banks Foreign financial institutions City commercial banks Postal savings bank Postal Savings Bank Non-bank financial institutions Foreign banks Non-bank financial institutions

(a)Rural financial institutions include rural cooperative banks, rural commercial banks, and rural credit cooperatives. Source: CBRC Annual Report

2. The China Postal Savings Bank (CPSB) was inaugurated on March 20, 2007, becoming the country’s fifth largest bank. This marked a huge step in China’s financial reform, as well as opportunities for the development of rural finance, as approximately 60% of the bank’s clients are located in rural areas.3 3. Commercial banks are divided into 2 sub-groups: ƒ Shareholding or joint-stock commercial banks are incorporated as joint-stock limited companies under the People's Republic of China's Company Law. Most of them have state-owned concentrated shareholders.4 ƒ City commercial banks have evolved from urban credit co-operatives (see Microfinance Service Providers). Due to their history, mandate and capital strength, the scope of city commercial banks’ business tends to be concentrated in the city where they are located. 5 4. Credit co-operatives: [see section on credit co-operatives within Microfinance Service Providers] 5. Foreign banks: After China’s banking sector opened completely on December 11, 2006, the number of foreign banks and the scope of their operations has greatly expanded. As of the end of December 2006, there were a total of 274 foreign banks operating in China, including 14 locally incorporated foreign-funded banks, 74 with branches in China, and 186 with representative offices. 6

Non-bank financial institutions: Non-bank financial institutions represent approximately 1.8% of China’s total assets, which has decreased by about 50% in the last 5 years. However, there remain more than 4,000 credit guarantee companies in China, some of which informally provide direct micro and small business lending. In addition, there are approximately 2,400 lending companies with a combined business volume of RMB 100 billion per year, a significant portion of which is directed towards microentrepreneurs7. The government recently acknowledged the legal status of these

1 “Vice Chairman JIANG Dingzhi’ speech at the 2007 China Rural Financial Forum,” December 7, 2007, http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2007122099ADA94986A6C0E5FF0E30C1D63CA700 2 “Vice Chairman JIANG Dingzhi’ speech at the 2007 China Rural Financial Forum,” December 7, 2007, http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2007122099ADA94986A6C0E5FF0E30C1D63CA700 3 “China's Postal Savings Bank Opens For Business,” Xinhua, March 20, 2007. 4 Maria L Lanzieni, “China’s Financial Sector: Institutional Framework and Main Challenges,” Deutsche Bank Research, January 9, 2004. 5 Maria L Lanzieni, “China’s Financial Sector: Institutional Framework and Main Challenges,” Deutsche Bank Research, January 9, 2004. 6 The CBRC, “Report on the Opening-up of the Chinese Banking Sector,” January 25, 2007, http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=200703220DEB2435789A50E9FF2A1732C43BBA00. 7 Lai, , “Microfinance Development in China and Potential Investment Opportunities,” IFC, Conference in Mongolia May 2008.

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companies by issuing regulations which mandate them to direct their services to the developing the rural economy. (see full related regulations in Appendix 3)

Total MF Regulatory Nbr of Nbr of MF Legal Statute outstanding MF Activities Body entities clients State-owned commercial banks CBRC 5 NA NA NA Policy banks CBRC 3 NA NA NA Joint-stock commercial banks CBRC 12 NA NA NA City commercial banks CBRC 124 NA RMB 100 billion Laid-off workers, students, poverty- stricken population in mostly urban areas Rural credit cooperatives(2) CBRC 8,553 73,000,000 RMB 314.1 billion 73 million rural households, or 32.7% of the rural demand for loans Foreign banks CBRC 29 NA NA NA Non-bank financial institutions CBRC 148 NA NA Agricultural production and farmers China Postal Savings Bank(1) CBRC 1 15,000 $62.6mm Collateralized microloans

(1) “An Interview with Zhu Dapeng,” http://www.microfinancegateway.org/content/article/detail/44109, 2007 (2) “Develop Micro Credit and Open Rural Financial Market,” speech by Wu Xiaoling, the People’s Bank of China, October 23, 2006. (3) CBRC Annual Report 2007 (4) “An Interview with Ms. Wang Fei (王绯)” http://www.microfinancegateway.org/files/44110_file_Highlight_on_China_Part_2_Interview_2_China_Development_Bank.pdf, 2007

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MICROFINANCE SERVICES PROVIDERS

Service Provider Advantages Disadvantages

ƒ Urban focused City Commercial Banks ƒ Professionalism ƒ Target clientele

ƒ Refinancing Microcredit Companies ƒ Community oriented ƒ Lack of banking expertise

Village Banks ƒ Low minimum equity ƒ Ownership structure

ƒ Governance RCCs ƒ Branch network ƒ Historical burden ƒ Service quality

ƒ Nationwide structure ƒ Too standardized Postal Savings Bank ƒ Information on 350 million clients ƒ Lack of credit experience ƒ Cross-selling

NGO & project based ƒ Governance ƒ Client oriented microfinance ƒ Size

Source: Conference for Promoting Microcredit Companies (July 17-18, 2008), GTZ and People’s Bank of China

City commercial banks (CCBs)1 Approximately 124 CCBs operate in primary and secondary cities throughout the country. In 2006, the China Development Bank launched a major effort to provide funds and technical support to selected CCBs that lend to micro, small and medium enterprises. This program has already begun to show results, with eight institutions in eight provinces currently managing a combined portfolio of over $80 million in loans outstanding to over 12,000 clients. Major players: Bank has been dedicated to the micro-credit business since 2001, when it first launched its laid-off worker micro-credit business, with each loan size of USD3,000. As of May 2008, Harbin Bank currently has urban micro-credit businesses in two cities and farmer loans in 2,672 villages in Heilongjiang province. At the end of 2007, the bank’s total microcredit portfolio was about 1 billion USD, accounting for about 33% of the bank’s total portfolio. The bank actively cooperates with several international microcredit focused organizations, including the IFC, Accion, and PlaNet Finance.2 The China Development Bank initiated microcredit programs to Commercial Bank and Taizhou Commercial Bank in December 2005. By August 2006, the two banks had extended 1,507 microloans with a total portfolio of RMB 74.9 million.3 (For a full list of commercial banks launching village banks see Appendix 1)

Microcredit Companies Microcredit companies have been rapidly expanding in the past two years, as they have an official legal status and are able to take on debt. Thus NGO MFIs are encouraged to transform into Commercial MFIs (MCCs) in order to make a larger impact on poverty. The PBOC, in partnership with local governments authorized licenses for seven pilot microcredit companies (MCCs) in five provinces in late 2005. For now, these microcredit companies will provide only lending services targeting the middle- and low-income market in , , Guizhou, and . As of the end of 2006, the pilots’ outstanding loan size reached 87.5 million RMB, with an average interest rate of 18.78%.4 (For a full list of the pilots, see Appendix 1)

Village Banks Government-backed In late 2006, the CBRC announced a new rural finance strategy with new licensing and supervision requirements called village and township banks. Village and township banks are able to absorb deposits, and have an official legal status (for full regulations see Appendix 3). To encourage the development of this new form of institution, the CBRC launched a pilot of village banks (for a full list

1 City Commercial Banks (CCBs): list of Domestic Financial Service Providers: http://www.cbrc.gov.cn/english/info/yjhjj/index_links.jsp?s=dbi 2 “BANKER’S MICROCREDIT PRACTICE AND PERSPECTIVE,” Li Hongquan, Harbin Bank, at Mongolia conference May 31, 2008. 3 “China Micro-Enterprises Win Sino-German Development Financing Support,” http://www.cdb.com.cn/English/NewsInfo.asp?NewsId=1861, September 2006. 4 “Operation of the 7 MCCs in the 5 Pilot Provinces in 2006,” Microfinance Bulletin 2006, The People’s Bank of China and GTZ.

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see Appendix 1) to deliver lending and deposit services in 36 counties in the provinces of Sichuan, Qinghai, , Inner Mongolia, , and . The banks are expected to serve agricultural production, rural households and rural areas in the county and are not allowed to take deposits or make loans out of the county boundary. So far, altogether 19 village banks in 6 provinces have commenced businesses and many banking institutions have applied for incorporating a village bank.1 Foreign players: Meanwhile HSBC Holdings PLC (HBC) established the first foreign-funded village bank, Hubei Zengdu HSBC Village Bank Co., Ltd., receiving approval from CBRC to launch a village bank and plans to begin operations by the end of this year. The new wholly owned HSBC venture is part of a rural banking program that fits into Beijing's broader plan of modernizing the countryside to narrow the gulf between the country's poor inland farmers and wealthier coastal residents. Standard Chartered has also launched a village bank in Inner Mongolia.

Cooperatives (and Unions) First launched in the 1950s, today there are a total of approximately 8,500 rural financial institutions and cooperatives, including Rural Credit Cooperatives (RCCs), urban cooperatives, rural commercial banks and rural cooperative banks. Given their sheer breadth of outreach, RCCs offer an exciting option for scaling-up access to financial services, however they have had historically inefficient operating structures leading to extremely high non-performing loan rates. 2 Thus, the government initiated a series of government reforms in 2003 to tackle key Recent Evolution of RCCs issues in operational management, corporate ￥7.0 10.9% 11.0% governance, and staff capacity ￥6.0 10.8% building, which were ￥5.0 10.5% implemented in seven provinces 10.5% 10.6% ￥4.0 10.5% and in one city: Zhejiang, 10.3% 10.4% ￥3.0 Shangdong, Jiangxi, Guizhou, 10.2% Jilin, Shaanxi, and the ￥2.0 city of Chongqing. In 2004 the ￥1.0 10.0% pilot reform program was ￥0.0 9.8% expanded by the PBC and CBRC 2003 2004 2005 2006 2007 3 to include all provinces. As a Total assets (trillions) Percent of all banking assets result of the reforms, some of the stronger RCC’s transformed into Source: CBRC 2007 Annual Report agriculture commercial banks, agriculture cooperative banks, county-level consolidated structures made up of multiple township-level RCCs, or township-level institutions with a clear ownership structure.4 Their remain problems that have yet to be resolved, including wrongly placed incentive structures from the government, decreased participation from RCCs and farmers in reforms, unclear objectives in rural unions, lack of progress in interest rate liberalization, poor corporate governance and human resource development, continued capital outflow from rural areas, and lack of alternative forms of finance in rural areas.

The government has continued its focus on the rural sector through the RCCs, as of the end of 2007 the PBOC allotted 128.8 billion yuan of central bank lending to the RCC’s, 12% of the central bank’s 1.1 trillion yuan. In 2005 the PBC started a bankcard initiative amongst the RCCs, and by the end of September 2007, RCCs in 24 provinces had launched the bankcard business and issued a total number of 64.57 million cards, accounting for 5% of the total amount in China.5

Postal Savings Bank of China The Postal Savings Bank of China is an independent financial institution providing rural retail services with around 21,000 branches and offices around the country, but traditionally only offered savings services.6 At the end of 2007, funds under the management of the postal savings institutions reached

1http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=20070530F78278E9BAD99664FF55A3BA238CB700 2 http://www.microfinancegateway.org/content/article/detail/28015 3 http://www.microfinancegateway.org/content/article/detail/28015 4 http://www.microfinancegateway.org/content/article/detail/28015 Interesting future development: http://www.microfinancegateway.org/content/article/detail/39906 5 “The CBRC approved the logo of “Fengshou Card” as China’s first rural union credit card brand jointly used by RCCs in Zhejiang Province,” http://www.cbrc.gov.cn/english/home/jsp/docView.jsp?docID=20080229F4C9C69E41AD1734FF72E445177DA500, December, 2007. 6 “Microfinance Development in China and Potential Investment Opportunities,” IFC, May 2008.

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1.18 trillion yuan.1 Benefiting from China Post’s extensive branch network throughout the country, the PSBC is well positioned to expand services to include loans, insurance and other financial services, in addition to existing savings and money transfers services.

NGOs and project based microfinance There are currently approximately 100 NGO project based microfinance organizations (MFOs) operating in China. (For a list of the largest organizations see Appendix 1) The government estimates that approximately 1 billion RMB of total money lent in China comes from NGO microfinance organizations, which is only about .002% of the country’s total money lent. These organizations’ expansion is limited due to the fact that they have no legal status, and thus can neither mobilize deposits nor take on debt. Thus, many of these organizations still run using money given to them as donations 10 years ago from UNDP and Grameen Trust funding.

Gross Loan Portfolio of Chinese MFOs

16.1% 3.8% 35.6% 3.9%

4.1%

4.2% 5.6% 11.6% 5.2% 9.8%

CFPA Kai Xian Nong Hu FPC ARDY TongJiang Xian Nong Hu Ningxia ARDPAS ZWSDA Women’s Development Association All others

Source : Financial Statements

The largest players are the China Foundation for Poverty Alleviation (CFPA) which has more than 30,000 clients (with more than 70 million RMB outstanding), the Funding for the Poor Cooperative (FPC) which has more than 15,000 clients (19.8 million RMB outstanding), and the China Association for Microfinance (CAM) which serves as an association to promote the development of China microfinance.

Foreign institutions and banks Both the World Bank and IFC are working with the China Development Bank as technical advisors to CCBs in China. The IFC has been operating in China since 1985, since which it has invested in 114 projects.2 It has recently participated in the development of a commercial microfinance institution in Chifeng, Inner Mongolia, and extended funding to Zhong An Credit in Shenzhen, and Microcred in , Sichuan.3 The Internationale Projekt Consult of KfW (IPC) has been working with over a dozen commercial banks to help them establish microcredit departments, build staff capacity, and explore specialized business development.4 Standard Chartered is also providing a 20 million RMB credit loan facility to finance microfinance projects run by the CFPA in ten counties designated as “poor counties” by the Chinese government. Citi Foundation, in partnership with the SEEP network and the CAM, is running a program called the Network Strengthening Program with the aim of integrating Microfinance into the mainstream economy.5

1 China Monetary Policy Report Quarter Four, 2007 http://www.pbc.gov.cn/english/huobizhengce/huobizhengcezhixingbaogao/2007.asp, July 2008 2 http://www.ifc.org/ifcext/eastasia.nsf/Content/China 3 Laude, Audrey, 11th MFC Conference of Microfinance Institutions, IFC, May 2008. 4http://www.microfinancegateway.org/files/44112_file_Highlight_on_China_Part_2_Interview_4_China_Association_of_Microfinance.pdf 5 http://www.chinacsr.com/2008/03/26/2206-citi-foundation-begins-microfinance-program/

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The UNDP was among the first to pilot microcredit in China more than 10 years ago. Since then, the UNDP programs have accessed more than 300,000 people. The UNDP supported the establishment of the China Association of Microfinance, and coordinated the Global Micro-entrepreneurship Awards, awarding outstanding clients across China1. The German Technical Corporation (GTZ) has been working in China since 1982, and works with the government to provide policy advice promoting sustainable development, particularly the development of microfinance. GTZ works closely with the PBOC, and has recently been strongly advocating for the expansion of MCCs and the Postal Savings Bank to expand its lending business.2 PlaNet Finance China works with both small microfinance organizations and banks to help them streamline their lending operations, update their methodologies and keep risk under control efficiently.

Mobile Banking: With more than 600 million mobile phone users in China as of June 2007, the use of text payments and other mobile banking applications are starting to grow. While policy, regulatory, and other challenges remain, mobile banking applications could help reduce costs and significantly expand a broader range of financial services to remote areas.3 A project initiated by Ericsson and the United Nations Development Programme (UNDP), is exploring affordable, innovative mobile solutions for rural residents.

1 UNDP China Annual Report 2006, http://www.undp.org.cn/downloads/keydocs/AnnualReport2006.pdf. 2 http://www.gtz.de/en/weltweit/asien-pazifik/china/1539.htm 3 http://microfinancegateway.org/content/article/detail/43767

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FINANCIAL SECTOR’S BACKERS AND MARKET FACILITATORS

The People’s Bank of China1 (PBOC) is China’s central bank, which works under the guidance of the State Council to formulate and implement monetary policy. The People’s Bank of China works to prevent and resolve financial risks and safeguard financial stability.2 It also manages the official foreign exchange and gold reserves.3

The PBOC oversees the State Administration of Foreign Exchange, which serves to set foreign exchange policies. SAFE is a government agency that creates rules and regulations regarding foreign exchange market policy, promotes the development of the foreign exchange market, and provides the PBOC with references for foreign exchange policy. 4

The China Banking Regulatory Commission (CBRC) was officially launched on April 28, 2003, and is responsible for: ƒ Formulating supervisory rules and regulations governing the banking institutions ƒ Authorizing the establishment, changes, termination and business scope of the banking institutions ƒ Compiling and publishing statistics and reports of the overall banking industry in accordance with relevant regulations ƒ Conducting on-site examination and off-site surveillance of the banking institutions as well as tests on the senior managerial personnel

CICETE was delegated by the Ministry of Commerce to coordinate the cooperation between China and the United Nations Development Program, the United Nations Industrial Development Organization and United Nations Volunteers, and to undertake the execution of the assisted programs. In addition it has also been cooperating actively with International NGOs and Chinese enterprises through its associate bodies as the China Association for Non-Governmental Organization Cooperation, the China Association for Service Trade and the China Association for Promoting UN Procurement. At present, 272 poverty-alleviation projects have been arranged in 78 counties of 25 provinces and autonomous regions in China. 5 CICETE provides a platform and support for the continued existence of the China Microfinance Association.

The Poverty Alleviation and Development Office is responsible for coordinating and supervising the investigations, research and activities conducted in economically backward areas. It also formulates guidelines, policies and plans for development in these areas, as well as facilitating an exchange of lessons learned in the process.

1 http://www.pbc.gov.cn/english/renhangjianjie/responsibilities.asp 2 Law provides that PBC perform the following functions: issuing and enforcing relevant orders and regulations; formulating and implementing monetary policy; issuing and administering its circulation; regulating inter-bank lending market and inter-bank bond market; administering foreign exchange and regulating inter-bank foreign exchange market; regulating gold market; holding and managing official foreign exchange and gold reserves; managing the State treasury; maintaining normal operation of the payment and settlement system; guiding and organizing the anti-money laundering work of the financial sector and monitoring relevant fund flows; conducting financial statistics, surveys, analysis and forecasts; participating in international financial activities in the capacity of the central bank; performing other functions specified by the State Council. http://www.pbc.gov.cn/english/renhangjianjie/responsibilities.asp 3 http://www.buyusa.gov/china/en/financial_services.html 4 http://www.buyusa.gov/china/en/financial_services.html 5 http://www.cicete.org/english/aboutus.htm

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4. Notes on the Insurance industry

INSURANCE PROVIDERS

China’s insurance market is one of the fastest growing and largest markets in the world, generating an estimated 421 billion RMB in premiums in 2005. These growth rates stem from China’s rapidly aging population, high savings rate and poor social security system. The market is widely underserved, with an estimated rate of 2.7% of population served. However, the regulations for foreign insurers are relatively stiff, with long approval processes for opening branches and difficulty in obtaining approval for special insurance products.

The market is regulated by the China Insurance Regulatory Commission (CIRC) which was founded in 1998 and is overseen by China's State Council. 1

The key domestic players include: Life Insurance Firms: China Life, Ping An, and China Pacific Life are the major life insurance players, who together account for 70% of the market. Other domestic insurers make up the 25% percent of the market, with about 24 foreign-invested life insurers only taking 5%.2

Non-life insurance firms: The People’s Insurance Company of China (PICC) has 50% market share. Taiping Insurance and Ping An together make up 22% of the market, while due to licensing constraints, foreign companies comprise only about 1%. 3

MICROINSURANCE Microinsurance Pilot Program Coverage The CIRC began researching microinsurance in May 2007, by creating a microinsurance research group which performed a survey in 8 different provinces in western China, asking over 10,000 rural residents about their needs for microinsurance. After this survey, the CIRC decided to start a pilot program in 9 provinces in western China for microinsurance. The pilot started at the end of June 2008, and aims to learn which products are most suitable for rural villagers.4

Other than this pilot program the microinsurance market remains largely untapped. Thus, many of the key China microfinance players are pushing to develop the sector, especially in light of the recent earthquake disaster in Sichuan.

1 http://www.buyusa.gov/china/en/financial_services.html 2 http://www.buyusa.gov/china/en/financial_services.html 3 http://www.buyusa.gov/china/en/financial_services.html 4 “保监会放闸 9 省区农村小额保险试点,” http://www.sina.com.cn, June 24, 2008

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5. Investment conditions & regulations

China’s regulatory environment has been historically limiting for the movement of capital in the microfinance industry. However, with the widening disparity between urban and rural areas, and unbalanced financial allocation of resources, the CBRC and PBOC have been driving for rural financial reform by relaxing the market entry policies for institutions in rural areas and encouraging banking institutions of their social responsibilities.1 The products that the major microfinance players in China can use are heavily dependent on their legal status.

The Limitations of Microfinance Products

Product CCBs Range PSBC RCCs Village Banks NGOs MCCs

Income level of clients

Source: Conference for Promoting Microcredit Companies (July 17-18, 2008), GTZ and People’s Bank of China

NGO microfinance organizations: There is no official legal status for NGO, project based microfinance organizations, which not only stops them from being able to mobilize deposits, but also prevents them from taking on debt. As a result they have difficulty expanding to new clients, and though they have a strong will to help the poor, they are unable to expand.

Microcredit Companies: Microcredit companies (“MCCs”) now have a formal legal status as a financial enterprise, as “non- deposit-taking lenders” in the form of a limited liability company or joint-stock company.2 MCCs are able to take on debt from international and domestic investors, and thus have been expanding rapidly. The government has acknowledged the importance of MCCs by issuing a set of guidelines for microcredit companies in the August 2007. The guidelines enabled MCCs to broaden their reach, and raised the loan amounts to RMB 300,000 in developed areas and RMB 50,000 for undeveloped areas.3 Other important regulations of MCCs are: ƒ MCCs have to be approved by a provincial government agency (e.g., financial affairs office) which handles insolvency cases. ƒ The share-holding structure limits non financial institution shareholders to no more than 10% each ƒ Capital requirements: limited liability company > 5.0 million RMB; joint-stock company > 10 million RMB ƒ Funding sources: borrowings from no more than two "banking institutions" < 50% net worth; but, non-banking institution and non-financial enterprise borrowing not specified ƒ Prudential rules: single customer limit < 5% net worth; loss provisioning > 100%4

1 “Vice Chairman JIANG Dingzhi’ speech at the 2007 China Rural Financial Forum,” December 27, 2007, http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2007122099ADA94986A6C0E5FF0E30C1D63CA700 2 Lai, Jinchang, “Microfinance Development in China and Potential Investment Opportunities,” IFC, Conference in Mongolia May 2008. 3 CBRC Annual Report 2007. 4Lai, Jinchang, “Microfinance Development in China and Potential Investment Opportunities,” IFC, Conference in Mongolia May 2008.

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Village Banks: Village Banks are a new regulation established by the government in December of 2006 in an effort to expand the breadth of rural financial institutions. As of December 2007, 13 village banks existed.1 Village Banks act as financial institutions which can mobilize savings deposits and take on debt investments. However, their equity structure is somewhat limiting: 20% of a village bank’s equity must be controlled by a financial institution, with each other shareholder controlling a maximum of 10% of the bank. The minimum equity for village banks is 3 million RMB. (For a full list of village bank regulations, see Appendix 3).

Rural Credit Cooperatives and Unions: Rural Credit Cooperatives: Rural credit cooperatives generally receive funding solely from the PBOC and the Agricultural Development Bank. Though international investors cannot invest in RCCs directly, they can help them transform into a commercial bank and then give them capital. Rural Mutual Cooperatives The rural mutual cooperatives are community-based mutual banking institutions jointly funded by village or town residents and village-based enterprises. The main capital sources of rural mutual cooperatives are members’ deposits, external endowments, or funds from other banking institutions. 2 Lending Companies The investors are limited to domestic commercial banks or rural cooperative banks.

City Commercial Banks are able to take on minority investments from international companies, provided they receive authorization from the CBRC. They generally developed from rural credit cooperatives, so most of their funding is currently government sourced.

Possibility to Possibility to Need for take debt from Legal Statute take debt in authorization foreign foreign currency from CBRC organization Commercial Bank RCCs X X X Village Banks Microcredit Companies NGO X X X

INVESTMENT PROCESS3

As the China microfinance market has slowly been opening up, more and more international investors are interested in getting involved in the market. Due to the restrictions on the market, for international investors, the opportunities to invest in China microfinance are: ƒ Commercial transformation of microcredit projects ƒ Microcredit Companies ƒ Village or Township Banks ƒ Participating in local commercial banks and helping them downscale ƒ Participating in the restructuring of RCCs and improving their small and micro lending lines

Foreign financial institution investors must meet the following conditions among others in order to invest in the Chinese microfinance market: ƒ Total assets over USD 1.0 billion, in principle ƒ Profitable in the last two consecutive years ƒ Capital adequacy ratio higher than 8% for banking institutions and 10% for non-bank financial institutions

1 “The first foreign-funded village bank officially starts operations,” http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2007121467443222E83F7B78FF54CB22AE052E00, December 12, 2007. 2 http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=200701303672D1C50B6C3B63FF9E53FF3D3D8900, January 29, 2007. 3 Lai, Jinchang, “Microfinance Development in China and Potential Investment Opportunities,” IFC, at conference in Mongolia, May 2008.

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ƒ Registration (originating) country in good economic condition and has an adequate banking regulatory framework; and the originating country’s bank regulator needs to sign a regulatory cooperation memorandum of understanding with CBRC

In addition to these restrictions, some other factors may limit the potential for foreign institutions to invest in Chinese microfinance: ƒ Both MCCs and Village or Township Banks are supposed to operate in a county, yet some counties do not have a sufficiently large market; however the geographic scope of operations may expand later for the competitive players in a similar way to the transformation of city commercial banks ƒ The 10% share-holding limit ƒ Good microfinance banks, internationally known, may not have total assets of more than USD 1.0 billion ƒ Investment funds run by international microfinance networks are not regulated entities, and thus may not be eligible to invest ƒ Refinancing channels for the MCCs are unclear

Thus, the major players in the Chinese microfinance market are searching to find ways to create national and regional microfinance entities which could invest or service multiple operators, including national/regional MCCs, service companies, microfinance investment companies, etc. In particular, GTZ and the PBOC are encouraging MCCs to create a network in order to exchange experiences and to better publicize information about each organization.

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Appendix 1 – Country MFI list

China’s Largest Microfinance Organizations sorted by gross loan portfolio (GLP) As of 12/31/2007 Type of Total GLP Number Interest Loan Size PAR>30 MFI name OSS Contact institution (RMB) of clients Rate (RMB) days

CFPA(a) Chinese NGO ￥70,035,040 27,853 12-18% ￥3,103 124.80% 0.00% [email protected]

[email protected], Kai Xian Nong Hu Chinese NGO 22,840,739 10,840 6.75% 400-1000 100.20% 2.30% [email protected]

FPC(b) Chinese NGO 19,187,716 NA 8-16% 1,000-5,000 109.30% NA [email protected]

Association of Rural Development of Non-profit civil 11,103,800 2,437 10% 3,744 97.50% 0.40% [email protected] Yilong County organization

TongJiang Xian Nong Hu Chinese NGO 10,232,612 3,300 10% Max 20,000 116.40% 3.00% [email protected]

Ningxia Yanchi County Association for the [email protected], Chinese NGO 8,310,000 2,906 10.2%-12% 1000- 5000 98.80% 0.00% Advancement of Women [email protected]

ARDPAS Chinese NGO 8,068,000 2,049 8-11% 500-20,000 102.50% 0.20% [email protected]

Chifeng Zhaowuda Women Sustainable Chinese NGO 7,619,200 3,128 7.5-16.3% 1,000-10,000 123.70% 0.00% [email protected] Development Association

30% > Tianjin Women’s Development Association Chinese NGO 7,479,029 1,358 6,000-30,000 106.50% 0.00% [email protected] prime rate

Rural Loan Cooperative of Puyang Cooperative 6,359,600 157 9-21% 2000-100,000 136.10% 0.10% [email protected]

Jinzhong Rural Poverty Development Chinese NGO 5,689,600 2,396 10% 2000 145.10% 0.40% [email protected] Association

Anding Microfinance Center of City Chinese NGO 3,173,570 1,279 9.50% 500-6000 62.70% 0.00% [email protected]

Government Wusheng Qi UNICEF 2,979,000 951 9.60% 3,000 165.50% 0.00% [email protected] Office

Guizhou Xingren Chinese NGO 2,844,758 1,844 8% 3,000 107.08% 1.37% [email protected] Source : Financial Statements, Annual Reports, and Applications. (a) As of 12/31/2006. (b) FPC’s organizations include Yixian, LaiShui, Yucheng, and Nanzhao.

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China’s Largest Microfinance Organizations sorted by gross loan portfolio (GLP) As of 12/31/2007 Type of Total GLP Number of Interest Loan Size PAR>30 MFI name OSS Contact institution (RMB) clients Rate (RMB) days

Guizhou Ziyun Chinese NGO 2,171,229 7,962 8% ￥500-3000 109.30% 3.10% [email protected]

PuCheng Women’s Sustainable Chinese NGO 1,837,000 1,572 9% 1000-8000 87.40% 0.00% [email protected] Development Ass’n

Government Gansu Weiyuan Xian UNICEF 1,405,500 568 9.60% 1,000-3,000 124% 0.00% [email protected] Office

XiXiang Women’s Development Chinese NGO 1,364,075 814 9.60% 1000-6000 123.10% 0.00% [email protected] Association

Guizhou Guanling Chinese NGO 1,081,307 1,458 8% 500-4,000 61.60% 0.00% [email protected]

Financial Lending Kunming Women’s Program 1,037,820 2,240 4.80% 5,000-30,000 NA NA [email protected] Company

Government [email protected], Qinghai Tongren 927,100 4,366 9% 1000-5000 57.62% 12.00% Office [email protected]

Longshuitou Microfinance Fund Unregistered MFI 806,900 NA 18% NA 132.91% 7.98% [email protected]

Ass’n For Rural Development Chinese NGO NA NA 6-8.8% 500-3,000 NA NA [email protected] of Tong Wei

Changsha Guarantee Centre of Government [email protected], NA 1,552 Prime rate 20,000 NA NA Microfinance for Re-employments Office [email protected]

Qinghai Guinan LPAC Chinese NGO NA 5,657 9.60% 500-3000 NA NA [email protected]

The Da Ba Mountains Academy For Biology And Poverty Chinese NGO NA 280 6-10% 2,000-10,000 119.30% 0.00% [email protected] problems

Rural [email protected], Xiangxi Zizhi Zhou NA 20 16.80% 2,000-40,000 63.50% 0.50% Organization [email protected]

Total ￥196,553,595 86,987 107.60% Source : Financial Statements, Annual Reports, and Applications.

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New Rural Financial Institutions:

Rural mutual cooperatives Approval Place Institution Name Date Bank's initiators 1 City, Inner Mongolia Tongliao City Liaohe Town Rongda Rural Mutual Credit Cooperative 2007.4 2 Baiyinxilei Meadow, Xilinhaote City, Inner Mongolia Chengxin Rural Mutual Credit Cooperative 2007.5 Yanjia Village, Yushutai Town, Lishu County, Jilin 3 Province Lishu County Yanjia Village Baixin Rural Mutual Credit Cooperative 2007.2 4 Yuedong Town, , Sichuan Province Cangxi County Yimin Rural Mutual Credit Cooperative 2007.6 Taozhu Village, , Dingxi City, Gansu 5 Province Min County Taozhu Village Minxin Rural Mutual Credit Cooperative 2007.3 Longwan Village Shilin Rural Mutual Credit 6 Longwan Village, Jingtai County, Gansu Province Cooperative 2007.3 Shengou Village, Yurun Town, Ledu County, Qinghai 7 Province Xingle Rural Mutual Credit Cooperative 2007.2 Qingshuihe Town, Chengduo County, Yushuzhou City, Chengduo County Qingshuihe Town Fumin Rural Mutual Credit 8 Qinghai Province Cooperative 2007.7

Source : CBRC 2007 Annual Report

Lending Companies Approval Place Institution Name Date Bank's initiators

Bailingmiao Town, Darhan Maoming'an United Banner, Darhan Maoming'an United Banner Baoshang Huinong Lending 1 Baotou City, Inner Mongolia Company 2007.2 Baotou City Commercial Bank 2 City, Jilin Province Jilin Dehui Changyin Lending Company, Co., Ltd. 2007.4 Jilin Bank

3 Ma'an Town, Yilong County, Sichuan Province Sichuan Yilong Huimin Lending Company 2007.2 Nanchong City Commercial Bank

4 Long'an Town, , Sichuan Province Sichuan Pingwu Fumin Lending Company 2007.6 City Commercial Bank

Source : CBRC 2007 Annual Report

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Village or township banks Approval Place Institution Name Date Bank's initiators

1 Guyang County, Baotou City, Inner Mongolia Guyangbaoshanghuinong Village or Township Bank 2007.2 Baotou City Commercial Bank

2 Dongfeng Town, City, Jilin Province Dongfengchengxin Village or Township Bank, Co., Ltd. 2007.2 Jilin Bank 3 City, Jilinn Province Panshirongfeng Village or Township Bank 2007.2 Jilin Bank 4 City, Jilin Province Dunhuajiangnan Village or Township Bank, Co., Ltd. 2007.3 Yanbian Rural Cooperative Bank

The Rural Credit Union of Pingluo 5 City, Jilin Province Qianguo County Yangguang Village or Township Bank, Co., Ltd. 2007.1 County, Ningxia Autonomous Region 6 City, Jilin Province Zhenlai CDB Village or Township Bank, Co., Ltd. 2007.11 China Development Bank

7 City, Hubei Province Hubei Xiantao Beinongshang Village or Township Bank 2007.4 Beijng Rural Commercial Bank 8 City, Hubei Province Daye CDB Village or Township Bank 2007.8 China Development Bank

9 Gaoleshan Town, , Hubei Provinces Xianfengchangnongshang Village or Township Bank, Co., Ltd. 2007.8 Changshu Rural Commercial Bank

10 Suizhou City, Hubei Province Hubei Suizhou Zengdu HSBC Village or Township Bank, Co., Ltd. 2007.8 HSBC Co., Ltd. Jiangsu Wujiang Rural Commercial 11 Yuyue Town, Jiayu County, Hubei Province Hubei Jiayu Wujiang Village or Township Bank, Co., Ltd. 2007.9 Bank 12 Yicheng City, Hubei Province Yicheng CDB Village or Township Bank 2007.1 China Development Bank

13 Jincheng Town, Yilong County, Sichuan Province Sichuan Yilong Huimin Village or Township Bank 2007.2 Nanchong City Commercial Bank Mianyang City Commercial Bank, 14 Qushan Town, Beichuan County, Sichuan Province Sichuan Beichuan Fumin Village or Township Bank 2007.7 China Development Bank Linqion Town, Qionglai County, City, Sichuan Ningbo Yinzhou Rural Cooperative 15 Province Qionglai Guomin Village or Township Bank 2007.11 Bank 16 City, Gansu Province Qingyang City Xifengruixin Village or Township Bank 2007.2 Xifeng Area Rural Credit Union The CDB Gansu Provincial Branch, City Jingchuan Huitong Village or Township Bank, Co., Pingliang Urban Credit Cooperative, 17 , Gansi Province Ltd. 2007.3 Jingchuan County Rural Credit Union City Commercial Bank, City Wudu Area Rural 18 Longnan City, Gansu Province Longnan city Wudujinqiao Village or Township Bank 2007.3 Credit Union 19 Datong County, Qinghai Province Datong County CDB Village or Township Bank 2007.7 China Development Bank

Source : CBRC 2007 Annual Report

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Pilot Microcredit Companies In millions of RMB As of December 31, 2006 Paid in Loan Cumulative Average Pilot Area Name of Pilot Company Capital Balance Loan Amount Interest Rate Pingyao County, Shanxi Jinyuantai Microcredit Co., Ltd. ￥20.0 ￥22.2 ￥32.8 21.44% Rishenglong Microcredit Co., Ltd. 22.0 22.7 36.8 17.89% City, Sichuan Quan Li Microcredit Company 10.0 9.5 15.1 15.36% Jiangkou County, Guizhou Jiangkou Huadi Microcredit Co., Ltd. 6.0 0.9 1.2 18.31% Hu County, Shaanxi Xinchang Microcredit Co., Ltd. 22.0 2.8 3.6 22.32% Dayanghuixin Microcredit Co., Ltd. 21.0 12.5 13.3 13.47% , Inner Mongolia Rongfeng Microcredit Co., Ltd. 30.0 17.2 17.4 21.73%

Total ￥131.0 ￥87.8 ￥120.1 18.65% Source : “Operation of the 7 MCCs in the 5 Pilot Provinces in 2006,” Microfinance Bulletin 2006, The People’s Bank of China and GTZ.

China Banking Association RCC members:

Rural Commercial Banks Rural Cooperative Banks Beijing Rural Commercial Bank Corp Tianjin Rural Cooperative Bank Shanghai Rural Commercial Bank

Rural Credit Cooperative Unions Anhui Rural Credit Cooperatives Union Rural Credit Cooperatives Union Shanxi Rural Credit Cooperatives Union Fujian Rural Credit Cooperatives Union Hunan Rural Credit Cooperatives Union Shaanxi Rural Credit Cooperatives Union Gansu Rural Credit Cooperatives Union Jilin Province Rural Credit Union Sichuan Rural Credit Cooperatives Union Guangdong Rural Credit Cooperatives Union Jiangsu Rural Credit Cooperatives Union Xinjiang Rural Credit Cooperatives Union Guangxi Rural Credit Cooperatives Union Jiangxi Rural Credit Cooperatives Union Yunnan Rural Credit Cooperatives Union Guizhou Rural Credit Cooperatives Union Rural Credit Union Zhejiang Rural Credit Cooperatives Union Hebei Rural Credit Cooperatives Union Inner Mongolia Rural Credit Cooperatives Union Chongqing Rural Credit Cooperatives Union Henan Rural Credit Cooperatives Union Ningxia Rural Credit Cooperatives Union Anhui Commercial Bank Heilongjiang Rural Credit Cooperatives Union Qinghai Rural Credit Cooperatives Union Yinzhou Bank Hubei Rural Credit Cooperatives Union Shandong Rural Credit Cooperatives Union

Source: China Banking Association http://www.china-cba.net/cbaenglish/eng2-2.htm

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Top 50 City Commercial Banks

Anhui Commercial Bank Jinzhou City Commercial Bank Shenzhen Commercial Bank Jiujiang City Commercial Bank Suzhou City Commercial Bank Baoji City Commercial Bank Langfang City Commercial Bank Taizhou City Commercial Bank Baotou City Commercial Bank Linyi City Commercial Bank Tianjin City Commercial Bank Changsha City Commercial Bank Liuzhou City Commercial Bank Urumchi City Commercial Bank Chengdu City Commercial Bank Nanchong City Commercial Bank Wenzhou City Commercial Bank Dongguan City Commercial Bank Nanjing City Commercial Bank City Commercial Bank Guiyang Commercial Bank Nantong City Commercial Bank Xiamen City Commercial Bank Hangzhou City Commercial Bank Ningbo Commercial Bank Xian City Commercial Bank Harbin City Commercial Bank City Commercial Bank Xianyang City Commercial Bank Huludao City Commercial Bank Qiqihar City Commercial Bank Yangzhou City Commercial Bank Jiaozuo City Commercial Bank Quanzhou City Commercial Bank Yantai City Commercial Bank Jiaxing City Commercial Bank Rizhao City Commercial Bank Yinchuan City Commercial Bank Jinan City Commercial Bank Shaoxing City Commercial Bank Zibo City Commercial Bank

Source: China Top 50 City Commercial Banks Report, 2006 (Chinese Version), Research and Markets, http://researchandmarkets.com/reportinfo.asp?report_id=363289&t=o&cat_id=

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International NGOs with operations in China Total Year Organization Mission impact started

ACCION Accion International is expanding their projects to microfinance in Inner Mongolia.

Bridges the US and China to provide specialized care for the smallest and weakest infants who are orphaned, life saving medical CARE (1) treatments and surgeries, foster care in loving families as well as encourage and promote adoptions of special needs children.

Relieves poverty in Sichuan by implementing small-scale village-based projects that promote rural development through capacity Development of Rural building, income generation, service provision (water and electricity), and environmental improvement. DORS focus is on women 8,000,000 1996 Sichuan (DORS) (2) and the poorest in the community.

Grameen Foundation & To create a vibrant Chinese microfinance sector that supports poverty alleviation programs by bridging the rural-urban, East- 2000 Trust (3) West poverty gap so prevalent in China today. Partners with FPC, CFPA and ARDPAS.

Heifer Project Heifer works to end hunger and poverty, and care for the earth by providing appropriate livestock, training and related services to 40,000 1947 International(4) small-scale farmers and communities worldwide. families

HOPE International (HOPE) is a global, faith-based, non-profit organization focused on poverty alleviation through Hope International (5) $242,224 2000 microenterprise development. Currently has 492 clients, and $242,224 of loans outstanding.

Mercy Corps Int’l (6) Partners with the China Foundation for Poverty Alleviation to provide affordable credit to farmers in four provinces.

Aims to transform lives by way of providing poor entrepreneurs with micro business loans, training and business consulting 943,224 Opportunity International(7) services that enable them to develop and sustain income-generating enterprises and create jobs for the unemployed. 318 clients

Works with people living in poverty striving to exercise their human rights, assert their dignity as full citizens and take control of Oxfam Hong Kong their lives.

Plan China (8) Provide resources and expertise so that communities can control their own development 1995

PlaNet Finance China, the China representative office of PlaNet Finance, is a non-profit and tax-exempt organization that works EUR1.1 PlaNet Finance China 2004 for sustainable social and economic development in China by supporting and promoting the microfinance sector. mm

Tibet Poverty Alleviation TPAF has provided small loans on a repeat basis to over 2,200 rural Tibetan families in target villages of townships in Lhoka and $122,045 1998 Fund (9) Nakchu Prefectures, and more recently in Namling County of Shigatse Prefecture.

Unitus is currently laying the groundwork to expand partnerships into China, and typically invests in financially sustainable, Unitus commercial microfinance companies.

(1) http://www.chinacare.org/ (2) www.dors.org.uk (3) http://www.grameenfoundation.org/where_we_work/east_asia/china/ (4) www.hpichina.org (5) www.hopeinternational.org (6) http://www.mercycorps.org/files/file1181760415.pdf (7) www.opportunity.net/partners/partner.profiler.asp?partnerSelect=9 (8) http://www.plan-international.org/wherewework/asia/china/overview/ (9) http://www.tpaf.org/

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Appendix 2 – Investors and Donors in China Microfinance

DONORS ADB, AusAID, CIDA, DFID, European Union, GTZ, IFAD, kfw, UNDP, UNFPA, UNICEF, World Bank, Mercy Corps.

International Founders or Private Sector Donors/Investors: Citigroup Foundation, Ford Foundation, Freshfields, Kadoorie Foundation Hong Kong, Motorola, Nike Corporation, Microsoft, Empower, Corning, Give2Asia, JPMorgan, Shell Foundation, Bayer, Areva, IFC, Microcred.

Banks, Investment funds or Private Investors (including domestic actors): Mr. Yang Lin, Mr. Mao Yushi, Fuping Foundation, , Commercial Bank, Tianjin City Commercial Bank, Standard Chartered, China Development Bank, Baotou City Commercial Bank, HSBC, Harbin Bank.

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Appendix 3 - Rules and regulations

List of main laws related to the microfinance sector

Provisional Rules Governing Lending Companies: January 2007 “A lending company is a limited corporation with its capital wholly contributed by domestic commercial banks or rural cooperative banks.” ƒ Article 2: The “lending companies” in these rules refer to the non-bank financial institutions incorporated in rural areas by domestic commercial banks or rural cooperative banks with the approval of the China Banking Regulatory Commission (hereinafter referred to as the “CBRC”) in accordance with applicable laws and regulations, to provide loan services specially to local farmers, agricultural production and rural economy. ƒ Article 3: The investors of a lending company shall have the rights to enjoy the asset proceeds, make important decisions, and choose managers in accordance with the law. ƒ Article 9: The investors of a lending company shall meet the following requirements: 1) The investors shall be domestic commercial banks or rural cooperative banks; 2) The asset volume shall be no less than RMB5 billion; 3) There are in place a good corporate governance and a sound and effective internal control system; 4) The main prudent supervisory indicators shall be in accordance with supervisory requirements; 5) Other prudent requirements as prescribed by the CBRC. Article 20 Lending companies may engage in the following businesses with the approval of the CBRC local office: 1) Making loans; 2) Discounting papers; 3) Conducting the transfer of assets; 4) Providing settlement service for loans; 5) Other asset businesses as approved by the CBRC.

Lending companies are not permitted to take deposits from the general public. Article 21 The operating capital of a lending company shall be paid-up capital and/or funds borrowed from investors. Article 22 The business operations conducted by a lending company shall aim at serving the farmers, agriculture and rural areas, and the loans shall be mainly made to support farmers, agricultural production and rural economic development.

Article 23 A lending company shall make loans in small amount and in a diversified manner so as to enlarge the loan coverage and avoid the loan concentration. The outstanding balance of loans to a borrower may not exceed 10 per cent of the company’s net capital. The credit balance authorized to a business group customer may not exceed 15 per cent of the company’s net capital. Article 28 A lending company shall truthfully record and reflect their business activities and financial status in an all-round manner and compile, on this basis, the annual financial and accounting reports, which shall be audited by qualified accounting firms. The auditing reports shall be submitted to the CBRC local office for records.

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Article 29 A lending company shall submit the accounting reports, statistic statements and other documents to the CBRC local office and be responsible for the truthfulness, accuracy, and completeness of such statements and documents.

Article 33 The CBRC shall, where necessary, take the following regulatory measures according to lending companies’ capital adequacy ratio (CAR) and asset quality: 1) Reducing the frequency of examination if a lending company’s CAR is above 8 per cent and NPL ratio below 5 per cent; 2) Intensifying on-and-off-site supervision and urging the company to make capital replenishment within a specified time limit and improve asset quality if the company’ CAR falls below 8 per cent but above 4 per cent or its NPL ratio exceeds 5 per cent; 3) Taking such supervisory actions as ordering to change senior executives, terminating all business operations, or having the company make reorganization within a specified time limit if the company’s CAR drops below 4 per cent or NPL ratio exceeds 15 per cent; 4) Canceling the registration or ordering the investors to take over the company if it fails to make reorganization and its CAR tumbles below 2 per cent.

September 2007 Guidelines from the CBRC: Guidelines on Banks’ Credit Businesses to Small Enterprises Article 2 The term “credit businesses to small enterprises” in the Guidelines refers to the businesses in which a bank authorizes credit up to RMB5 million to a single enterprise, a legal entity or an individual proprietor whose total assets are no more than RMB10 million or whose annual sales revenue reaches no more than RMB30 million.

Provisional Rules Governing Village or Township Banks1 January 29, 2007 Chapter I General Provisions Article 2 The village or township banks hereunder refer to the banking financial institutions set up by domestic or foreign financial institutions, domestic non- financial legal entities, and/or domestic natural persons in rural areas with the approval of the China Banking Regulatory Commission (hereinafter referred to as the “CBRC”) in accordance with applicable laws and regulations, to provide financial services mainly to local farmers, agricultural production and rural economy. Article 3 A village or township bank is an independent legal entity that enjoys the entire property of the entity that is formed by the investments of its shareholders. It shall fully enjoy civil rights and assume civil liabilities to the extent of all its assets. The shareholders of a village or township bank shall have the rights to enjoy the asset proceeds, make importance decisions, and choose managers in accordance with the law. They shall be liable for the bank’s debts to the extent of their respective capital contributions or shareholdings. Article 5 Village or township banks shall not grant credit loans to their connections. The conditions for granting secured loans thereto shall not be more preferential than those for granting the same type of loans to other borrowers.

Village or township banks shall not grant loans to those other than local borrowers. Chapter II Establishment

1Condensed version, for full articles, see: http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=20070518B45B01B69A22D905FFB6CBF6956DAF00

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Article 7 The name of a village or township bank shall be composed of the administrative division, firm name, industry and corporate form in a sequential manner, among which the administrative division means the name or geographical name of the administrative division at the county level.

Article 8 A village or township bank shall meet the following requirements for establishment: 1) The articles of association shall satisfy applicable provisions; 2) The initiators or contributors shall meet applicable conditions and at least one of them shall be a banking institution; 3) The registered capital of a county based village or township bank shall be no less than RMB3 million and the that of a township based village or township bank shall be no less than RMB1 million; 4) The registered capital shall be a lump-sum cash capital paid by the initiators or contributors in full amount; 5) The board directors and senior management personnel shall be with appropriate qualifications; 6) The staff shall be with necessary professional knowledge and experience in work; 7) There are in place sound organizational structure and management system; 8) There are in place required business premises, safety precautions and other facilities relevant to the business operations; 9) Other prudent requirements as prescribed by the CBRC.

Article 16 Village or township banks can set up branches within the county region to meet the demands of rural areas for financial services or according to their own business strategy. There will be no restriction on the amount or percentage of operating capital when a village or township bank establishes a branch.

Article 17 The application for the establishment of a village or township bank branch shall go through two stages, first for the preparation for incorporation and second for the business commencement.

The village or township bank, which plans to set up a branch, shall provide to the CBRC local offices ex ante a preparation plan for a record.

The application for the business commencement of a branch shall be subject to acceptance, examination and approval by the CBRC local offices. The said offices shall make a decision on whether or not to approve it within two months from the date of the acceptance thereof.

Chapter III Ownership arrangement and qualification of shareholders Article 21 To fund the establishment and take shares of a village or township bank, a domestic financial institution shall meet the following requirements:

1) A commercial bank, being the applicant for setting up a village or township bank, shall have a capital adequacy ratio of no less than 8 per cent both on a solo and consolidated basis and with main supervisory indicators meeting regulatory requirements; other financial institutions, being the applicant, shall have their main compliance indicators and supervisory indicators satisfy regulatory requirements; 2) having been in good financial standing and been profitable for two consecutive years prior to the application; 3) having true and legitimate sources of stakes; 4) having been in place good corporate governance and a sound and effective internal control system; and 5) other prudent requirements as specified by the CBRC.

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Domestic financial institutions shall obtain the prior consent of the banking regulatory authority and other related government agencies before funding the establishment of a village or township bank or taking shares in a village or township bank.

Article 22 To fund the establishment or take shares in a village or township bank, a foreign financial institution shall meet the following requirements:

1) having a total asset, in principle, of no less than USD1 billion as of the end of previous year; 2) having sound financial strength and creditworthiness and been profitable for two consecutive accounting years prior to the application; 3) a banking institution shall have its capital adequacy ratio reach, at least 8 per cent, the average ratio of the local banks in the city where the proposed village or township bank is to be registered; the total capital of a non-banking financial institution shall be no less than 10 per cent of the risk-weighted assets; 4) having true and legitimate sources of stakes; 5) having in place good corporate governance and a sound and effective internal control system; 6) having in place a sound financial regulation and supervision system in its home country or region; 7) the application for funding or taking shares of a village or township bank shall have been complied with the laws, regulations and regulatory requirements of its home country or region; 8) having good economic situation in its home country or region; and 9) other prudent requirements as specified by the CBRC.

Article 23 To fund the establishment and take shares in a village or township bank, a domestic non-financial enterprise shall meet the following requirements:

1) having registered with the commercial and industrial administrative authority and having the status of legal person; 2) having good reputation, good faith records as well as good records of tax payment; 3) being in good financial standing and profitable in the year prior to the application; 4) net asset after year-end distribution reaching 10 per cent or more of the total assets (on the basis of consolidated accounting statements); 5) having legitimate sources of stakes, and borrowed funds or trusted funds are prohibited to invest as shares; 6) having been capable of operation management and been with strong capital strength; and 7) other requirements as specified by the CBRC.

An applicant enterprise that has completed corporate reform may count the operational results and age of the original enterprise as parts of the new enterprise.

Article 24 To fund the establishment and take shares in a village or township bank, a domestic natural person shall meet the following requirements:

1) having the capability to independently assume civil liabilities; 2) having good social prestige and good faith records; 3) having legitimate sources of stakes, and borrowed funds or trusted funds are prohibited to invest as shares; and 4) other prudent requirements as specified by the CBRC.

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Article 25 The controlling shareholder or sole shareholder of a village or township bank must be a banking institution. The controlling shareholder who is a banking financial institution shall hold at least 20 per cent of the bank’s total equity. The individual natural persons and their related parties shall hold no more than 10 per cent of the bank’s total equity and the individual non-bank financial institutions or non-financial enterprises shall hold no more than 10 per cent of the bank’s total equity.

Any organization or individual who wants to hold more than 5 per cent of a village or township bank’s total equity shall obtain prior consent of the CBRC local offices.

Chapter IV Corporate Governance

Article 33 A village or township bank shall have one president and one to three vice presidents where necessary. Small-sized village or township banks may have the chairman of the board or executive director to serve as the president. The board or supervisory department (or post) shall conduct an annual targeted auditing on the president’s performance and report to the board or shareholders’ meeting and meanwhile file a record with the CBRC local offices. Upon the end of the term, the president and vice president(s) shall be subject to the departure auditing.

Chapter V Operation and Management

Article 38 Village or township banks may engage in some or all of the following businesses with the approval of the CBRC local offices:

1) taking deposits from the general public; 2) granting short-term, medium-term and long-term loans; 3) handling domestic settlements; 4) handing the acceptance and discounting of negotiable instruments; 5) engaging in inter-bank lending; 6) engaging in bank card business; 7) acting as an agent for issuing, honoring and underwriting of government bonds; 8) acting as an agent for receipt and payment of money and for insurance companies; and 9) other businesses as approved by the banking regulatory authority.

A village or township bank can act as an agent for financial institutions including policy banks, commercial banks, insurance companies, and securities firms in accordance with applicable regulations and rules. Where conditions permit, a village or township bank shall set up ATMs in rural areas and issue bank cards to farmers and rural economic organizations according to their credit standings. In villages or towns with a vast land area but small population, village or township banks may deliver services in a mobile manner.

Article 39 After having made full amount of deposit reserves, a village or township bank can utilize all funds available to support local economic development. When making loans, priority should be given to rural households within the county region to meet the needs of agricultural production and rural economic

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development. When the actual funding needs for agricultural purpose are fully satisfied, the surplus funds can be used to invest in local industries, purchase agriculture-related bonds, or fund other financial institutions.

Article 40 A village or township bank shall have in place a credit authorization arrangement tailored to its own business development so as to reasonably set credit lines for different borrowers. Within the ceiling of the credit, the bank may make revolving loans with a one-off credit authorization.

Article 41 A village or township bank shall stick to the principle of making loans in small amounts and with wide range so as to enlarge the coverage of loans and avoid the excessive centralization. The outstanding balance of loans made to a same borrower by the village or township bank may not exceed 5 per cent of the bank’s net capital. The credit balance authorized to a business group customer may not exceed 10 per cent of the bank’s net capital.

Article 42 A village or township bank shall put in place a prudent and normative asset classification system and a capital replenishment and constraint mechanism in order to correctly classify the asset quality, make adequate provisions for non-performing assets, promptly write off bad debts, truthfully report operational results, and meanwhile ensure the capital adequacy ratio is no less than 8 per cent at any time together with its adequacy ratio of provisions for impaired assets being no less than 100 per cent.

Article 45 A village or township bank shall submit the accounting statements, statistic statements and other documents to the CBRC local offices and be responsible for the truthfulness, accuracy, and completeness of such statements and documents.

Chapter VI Supervision and Inspection Article 51 The banking regulatory authority shall, where necessary, take the following regulatory measures according to village or township banks’ capital adequacy and asset quality:

1) The banking regulatory authority may reduce the frequency and scope of on-site inspection if a village or township bank’s capital adequacy ratio (CAR) is above 8 per cent and the ratio of non-performing loans (NPL) below 5 per cent; 2) It shall urge those banks with the CAR being above 4 per cent but below 8 per cent to develop a viable capital replenishment plan to improve the CAR within a specified time limit. In a meantime, the banking regulatory authority shall reinforce off-site surveillance and on-site inspection, and take necessary actions to rein in their asset growth rate, fixed assets acquisition, distribution of dividends and other income, establishment of branches, and commencement of new businesses; 3) It may instruct those banks, whose CAR drops to 4 per cent while NPL ratio exceeds 15 per cent, to change directors or senior executives, terminate part or all of business operations, or make reorganization within a specified time limit; 4) It shall take over the bank or cancel the registration or announce bankruptcy thereof if it fails to reorganize itself effectively and the CAR drops to 2 per cent or below.

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Appendix 4 - Contacts and extra information

Websites www.microfinancegateway.com www.cbrc.gov.cn http://www.adb.org http://www.mckinsey.com/mgi/mginews/chinacapital.asp http://www.cdb.com.cn/ http://www.ifc.org/ifcext/eastasia.nsf/Content/China http://www.undp.org.cn/ http://www.gtz.de/en/weltweit/asien-pazifik/china/1539.htm http://www.cicete.org/ http://www.pbc.gov.cn/

Contacts

PlaNet Finance China

Kira Dubas Rm 2508 Dang Dai Wan Guo Cheng 1 Xiangheyuan Lu Beijing, China 100028 +86.01.8550.8458 [email protected]

Gabrielle Harris Rm 2508 Dang Dai Wan Guo Cheng 1 Xiangheyuan Lu Beijing, China 100028 +86.01.8550.8458 [email protected]

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