CHINA Country Overview August 2008 13 rue Dieumegard 93 400 Saint-Ouen Paris - France Tel 33 (0) 1 49 21 26 26 Fax 33 (0) 1 49 21 26 27 Email [email protected] 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 China Microfinance 27 Appendix 3 - Rules and regulations 28 Appendix 4 - Contacts and extra information 34 www.planetfinance.org 2 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 Bank of China. www.planetfinance.org 3 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 Hong 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 www.planetfinance.org 4 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 (yuan) 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 www.planetfinance.org 5 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.