China Was Slow to Embrace Microfinance, But the Government's Attitude is Changing III

To continue the story from last post ...

Although there are still legal and practical hurdles for MFI and organizations like Wokai to operate freely in China, like everything else in that country today, the policys are changing.

According to this article, "China Legalizes Private Lending to Ease Rural Credit Pressure", and this one,

... the central bank said it would formulate regulations on private lenders (which, presumably, includes MFIs) and develop the sector into a significant player in the country's rural money markets.

In October 2008, the government began to allow microfinance institutions to take on commercial debt and permitted Citigroup to open two microfinance banks in Hubei Province (see this CCTV9 clip).

China Was Slow to Embrace Microfinance, But the Government's Attitude is Changing II

To continue the story from last post ...

Although the Chinese government's own anti-poverty policy looks more and more like microfinance, and the government becomes more and more willing to work with international agencies, there are still restrictions on independent, non-government-funded MFIs today.

Two restrictions matter most
1. Non-financial institutions such as NGOs are prohibited from supplying any type of financial services to the poor. Hence, "NGO’s microfinance activities are, in theory, illegal." (as quoted from this article)
2. There is an uniform interest rate ceiling imposed by the government, making MFIs impossible to operate (e.g. reaching out to borrowers)

To be continued ...

China Was Slow to Embrace Microfinance, But the Government's Attitude is Changing

China has been slow to embrace microfinance. According to Casey Willson in this video, China's microfinance portfolio is only $200 million, whereas Bangeladash, with a population 1/10 of that of China, has a portfolio of $500 million.

There are many reasons why this is case. In short, China has a super tight control of the banking industry and the credit market in general. While banking industry has always been considered a "strategic industry" by the government (see 薄一波's memoir, in which he recounted how the communists were almost out-maneuvered by Shanghai bankers after they took control of the city), the Asian financial crisis of 1997-98 further stunned the Chinese leaders into uncontrolled-capital-flow skeptics.

For a brief historical review of the Chinese government anti-poverty efforts, you can read this article. In short, the changes were:
1. from direct subsidy to targetted loans and credits
2. from central redistribution only to international cooperation

Keywords: 八七扶贫攻坚计划, 小额扶贫, 杜小山, 扶贫经济合作社

To be continued ...