Speechof Deputy Governor Wu Xiaoling
Asia Pacific Micro-Credit Forum
Beijing, China
March 22, 2006
Ladies andGentlemen,
Good morning!
Let me firstexpress my warm congratulation on the opening of the Asia Pacific Micro-creditForum. In the past century, human beings created tremendous wealth and improvedevidently the living and welfare standards. However, we face many problems atthe same time as economic aggregates grew rapidly, such as environment pollution,resources constraint and polarization between rich and poor etc. The commonissues many countries face in the 21st century will be how to makethe earth on which mankind relies for existence much cleaner and how to giveeveryone an equitable development chance in the process of economicgrowth.
Since the lastcentury, China has achieved remarkable accomplishments insocial and economic development. But in terms of distribution, the income gapsbetween urban and rural areas and between different regions have widenedgradually and drawn more and more attention. Some researchers pointed out that,development chances usually belong to people with certain capitals in theperiod when financial intermediaries were underdeveloped or in countries wherefinancial intermediaries were less developed, while people lack of capitals areexcluded from economic growth and could not share the benefits of economicgrowth. However, with the innovation of financial institutions and financialinstruments, in a comparatively developed financial system, people lack ofcapital but possess some production skills or entrepreneurships will obtaindevelopment chances thanks to the available and suitable financial instruments.In recent years, micro-credit, as an available and suitable financialinnovation, has drawn many attentions from the public, internationalinstitutions and international donors and even some explicit supports fromgovernments in developing countries because it can help people from low-incomecountry who have willingness and development potential to grasp the opportunityto increase income and shake off poverty. When the income gaps between urbanand rural areas and between different regions widen continuously, large low-incomepopulation in rural areas and mid-western regions of China as well as numerousprivate producers and micro-enterprises demand urgently for the suitablefinancial services including equity financing and micro-credit financing.
Since 2005,Chinese government has paid increased attention to micro-credit. First, reformof the rural credit cooperatives has been underway smoothly and the number ofrural households that have access to micro-credits and joint guaranteedmicro-credits from rural credit cooperatives (RCCs) nationwide reached 71.34million as of the end-September, 2005, accounting for 32.31 percent of thetotal 220 million rural households. Given that around 120 million ruralhouseholds of the 220 million rural households had real borrowing needs, themicro-credit provided by the rural credit cooperatives met 60 percent of theirneeds. Second, the CBRC issued the Guideline on the Credit Business of CommercialBanks to Small Enterprises in July 2005, with a view to promotingfinancial services to small enterprises through guiding banking sector toestablish “six mechanisms”, including interest risk pricing, effectivediscipline and default information disclosure mechanisms. Many banksestablished successively special units to manage small enterprises’ loans. Forexample, the Industrial and Commercial Bank of China and the Agricultural Bankof China established special units for credit to small enterprises in pilotregions, Shanghai Pudong Development Bank, China Minsheng Banking Corp. andChina Everbright Bank established small & medium-sized customers departmentor small & medium-sized enterprises servicing center, and some other citycommercial banks and rural commercial banks established special units or teamsas well. Furthermore, China Development Bank also joined in a special way, bysigning a strategic cooperation agreement with Taizhou Commercial Bank toconduct pilot credit business to micro-enterprises. As of end 2005, theoutstanding balance of micro-enterprises loans of the main banking institutionsin China amounted to 2.68 trillion yuan, increasingby 205.736 billion yuan from the beginning of the year. Third, apart from about300 micro-credit projects led by non-government organizations in China, 5 provinces are undergoing the pilot commercializedmicro-credit organization program. At end-2005, two private micro-creditinstitutions in Pingyao, Shanxiprovince were established with approval to extend loans, and more similarinstitutions will be established on a pilot basis in other regions.
But currently thedevelopment of micro-credit business has not fully met the social and economicdevelopment needs. To advance economic growth in mid-western regions and vast countrysideand include low-income population in such regions into the general economicdevelopment track so that they can enjoy the benefits of economic growth,micro-credit should play a more important role in this regard. We have to cope withvarious challenges, such as the credit market in Chinais not fully diversified, institution setup does not fit in with risk controlrequirements and credit culture and legal environment need to improve etc.Therefore, we should create a better social environment with a view topromoting the healthy development of micro-credit.
I.Developing micro-creditthat provides services for private producers and micro-enterprises shouldcenter on developing regional financial institutions.
Private producersand micro-enterprises are characterized by weak production stability, unsoundfinancial situations and hard to standardize relevant credit registration,therefore the direct contact between lenders and clients becomes crucial, andaccordingly micro-credit is a labor-intensive work. The successful micro-creditactivities in China rooted in the diligence of credit issuersand the good customer relationships they have established. One credit issuer ofAgricultural bank in Siyang county, Su Qian of Jiangsu province has issued more than 60 million yuan of rural household’sloans in 16 years, involving thousands of loans without any bad ones, thanks tohis visit to every household. Taizhou Commercial bank has high quality loansbecause the client managers paid tremendous visits to farmers to obtain many “softinformation”. They said, “ Once an old client comes to us, we could basicallytell why he comes to the bank today; if one client asks for credit, we canreply promptly whether we will extend loans and how much we can. Sometimes ourclients joked that the client managers in Taizhou Commercial Bank are able to readfaces. ”
If a national bigbank directly conducts retail business in micro-credit field, it will face highcosts of risk control and transaction. On one hand, big banks will find outthat they don’t understand the risk profiles of those micro and seeminglyirregular clients, at the same time, such clients may not be able to provideenough qualified mortgages or pledges so as to put big banks in such a plightwhen they encounter problems as pre-loan “adverse selection” and “moral hazards”after loan issuance. On the other hand, negotiating individually with numerousmicro-clients is likely to incur high transaction costs while the financialservices requirements of those clients are not complicate enough to bringbenefits of economic scale for big banks. Accordingly, there are no technicaladvantages for big banks to directly conduct micro-credits.
Economicdevelopment in China is not balanced judged from many aspects.Multi-layered economic development level and complicated economic structurerequire multi-level financial institutions to provide relevant services.Accordingly, various financial institutions should divide the credit marketaccording to “cost-efficiency” principle and comparative advantages to preciselychoose their target markets and development strategy. Contrast to national bigbanks, regional financial institutions have comparative advantages in regardsof micro-credit fields that target private producers and micro-enterprises.Apart from having more natural advantages, regional financial institutionscould also resort to some flexible measures that regular financial institutionslack of to deal with information exchange and transaction costs. Regionalfinancial institutions are located in communities, so their client managersunderstand more about the risk characters of potential micro-credit clients inthe community as well as control credit risks through some “social assets” oftheir clients except their economic assets or in virtue of some informalguarantee and mortgage that is hard for big banks to take. As a result,developing micro-credit business that provides services for private producersand micro-enterprises should focus on the development of regional financialinstitutions and community financial institutions.
II.Create a moderatelycompetitive financial environment to improve financial services and reduce servicefees.
In order toenhance the quality of county-level economy and rural financial services, weshould strive to create a moderately competitive financial environment. Whilebig commercial banks including the ICBC, BOC and CCB gradually cut down theirbranches in county-level economies due to cost and risk control factors,Agricultural Bank of China and Agricultural Development Bank of China shouldpersist in the direction of serving for agricultural development and establishorganizational structures and function mechanism suitable to the development ofagriculture through reform. We should encourage big commercial banks torestructure their outlets in counties and encourage private capital toparticipate in such restructuring of financial institutions in order to reduceshocks from restructuring and strengthen their services for county-leveleconomies. We should also create much eased policy environment for the newlyestablished financial institutions with independent legal status in a county.
Creditcooperatives have become an important financial service provider in countiesand wide rural areas of China. We must deepen the reform of rural creditcooperatives by persisting in the direction of serving for agriculture andfarmers. We should pay proper attention to the external constraint of rural creditcooperatives’ operation, such as market competition and possible M &Aactivities apart from focusing on reestablishing effective internal controlsystem, namely, reasonable corporate governance structure. We propose to reformthe traditional “one RCC in one township” arrangement by liberalizingcross-region operation and competition of the RCCs and removing the restrictionthat only one RCC is allowed to establish in one township to encourageestablishing new institutions and stimulate RCCs to provide service for therural economy.
We should, throughtax policy, guide the financial institutions to provide financial services forrural areas and transfer funds to countryside so as to promote the modernizationof the agricultural industry and urbanization of countryside.
III.Create a goodsocial environment for the development of formal financial institutions throughguiding rational development of the informal financial services
Informal financingexists since long time ago. If private funds participate in lending activitiesin accordance with relevant rules on interest rate, informal financing isunlikely to damage social economic order rather it could be a beneficialsupplement to formal financing and even a barometer of social financialdemands. Judged from past experiences, problems in informal financing stemmedfrom illegal public financing activities without permission. I believe, a goodpolicy to prevent social and financial disorder should focus on establishing agoverning mechanism that guide its healthy development while imposing harshpunishment on irregularities.
Regular informalfinancing is usually based on kin relationship or community relationship, so itfeatures in high efficiency but low financing amount due to the low creditregistration cost and hash punishment on credit slippage. Informal financingshould be a normal phenomenon in terms of laws and regulations given that weshould respect the rights of a citizen to treat his or her own wealth and thefreedom of signing agreement with other citizens. But sometimes informalfinancing may be taken advantage by some badmen, so it is necessary for thegovernment to guide and regulate informal financing activities to protectpublic interests. For example, although the Usury Act in South Africa has clauses to punish usury activities, registeredmicro-credit activities are not subject to the restrictions in the Usury Act.
A practical choiceto guide the development of informal financing will be to allow individuals or specialcompanies to provide micro-credit under regulations stipulated by localgovernments and restrictions of the Contract Law and the individual creditregistration system when credit environment in Chinais not much healthy. Facilitating citizens’ financing activities and cuttingdown the threshold of conducting legal financing activities will reduce theprobability of illegal financing actions in essence, and effectively crack downcriminal activities as well.
The No.1 documentof the central government in 2004 called to “ continue the effort to expand micro-creditsand the joint-guaranteed loans to the farmers. Efforts should be made, throughattracting social and foreign funds, in setting up financial institutions withdiversified ownerships to directly provide services for the rural economy. TheNo.1 document of the central government in 2005 already clarified that regionsin good conditions could explore to establish micro-credit organizations closeto the needs of farmers and villages and launched by natural persons andenterprises. Furthermore, the No.1 document of the central government in 2006pointed out that, establishing community financial organizations in countieswith diversified ownerships were encouraged, and private as well as foreigncapitals are allowed to invest in such entities. Efforts should be made infostering micro-credit organizations launched by natural person, enterprisesand associations with legal person status. Farmers will be guided to developcredit unions. Informal financing should be regulated.” In fact, the No.1documents of the central government in following 3 consecutive years all putemphases on encouraging institutional innovation in rural financial system,while in recent two years it clarified that micro-credit should be developedgreatly as an appropriate financial innovation. Obviously, a micro-creditorganization is unlikely to become an important component of the ruralfinancing system, but it is indeed a catalyst to activate rural financing. Oneof the responsibilities of the government is to maintain the social andeconomic order and make citizens responsible for the consequence of their ownbehaviors while respecting citizens’ economic freedom. Once a citizen hands hismoney to a third person for collective usage, the government should point outthe potential risks and conduct prudential supervision over the fund receivers,which is the function of financial supervision authorities. We will not allowthe proposed micro-credit company to absorb public deposits but only use itsequity from several limited shareholders and wholesale financing from otherinstitutions to conduct relevant business. The shareholders of the micro-creditcompany and the institutions that provide funds should bear relevant risks fromfunds operation. Once the micro-credit company failed, it would not bringexternal damages to our society. On the contrary, a well-functioned micro-creditcompany will win trusts of the society and therefore has more diversified financingchannels or create conditions to establish a new form of financialinstitution. To regulate the lending activities of the micro-creditcompanies, the central government or local government should stipulate the Ruleson Management of Creditors, in which the industrial and commercialadministrative authorities should be responsible for registration management;the individual credit registration system should require lending information tobe registered and provide basic financial knowledge training program for boththe borrowers and lenders, and the court should be able to adjudicate borrowingcontract disputes.
Regulated informalborrowing and lending activities could change the society into a financialuniversity. In this university, public risk awareness and credit profile willbe improved and people who are interested in financial business will have achance to practise. We are expecting our society to reach consensus in thisissue.
