Microloans a crucial 'stimulus package'

Since Wang Shulian started a gypsum factory nine years ago, her brick home in the countryside of northwestern China's Ningxia Hui autonomous region has gradually filled with the signs of relative wealth: a refrigerator, television, DVD player, and a telephone.

She funded her company, which makes a mineral powder used in plaster, through small loans starting at 1,000 yuan from an organization that supports rural women. Her monthly income has reached 10,000 yuan, up from zero in 2000.

While China's 4 trillion yuan stimulus package to build roads, housing and other projects has grabbed headlines, microloans for farmers and entrepreneurs like Wang may be a more sustainable path to the rural consumption and growth officials say is key to continued expansion.

"Getting the money to trickle down" to the lowest level of the economy "is very, very important for the long-term development of China", said Tammy Lam, who left her job as chief risk officer at Citibank (China) Co last year to found Rural Impact Professionals, a nonprofit that fosters microcredit.

Slowing growth has pushed as many as 30 million migrant workers from cities back to their villages in search of jobs. With annual rural incomes averaging 4,761 yuan - less than a third of urban incomes - the government has prioritized credit to fuel growth in the countryside, where 54 percent of the population lives. China's economy expanded 6.1 percent in the first quarter from a year earlier, the slowest pace in almost a decade.

Nobel prize

Microfinance provides small loans of a few thousand yuan to people in poverty who can't get regular bank funding. Such programs have encouraged rural growth in countries including Bangladesh, where Nobel Peace Prize-winning economist Muhammad Yunus established Grameen Bank in the 1980s to extend loans to the poor.

"It's really effective," said Wang, 58, whose success encouraged her neighbors to get loans to raise sheep, expanding their village economy beyond subsistence farming. Many families now make at least several thousand yuan a year. Without the loans, "we'd still be poor," she said.

Her lender, Ningxia Huimin Microfinance Co, was founded in 1996 with the Chinese government support and mainly provides credit to rural women organized into groups that help enforce repayment - a method Grameen Bank uses to compensate for lack of collateral. Ningxia Huimin, which is now an independent microcredit company, serves almost 4,500 households with an average loan of 4,000 yuan that's paid back over a year. Interest rates are 10.2 percent to 12 percent - higher than traditional business loans.

Expanding credit

For every 1,000 yuan households borrow a year from Ningxia Huimin, income increases 776.7 yuan, according to a 2007 survey of clients. It plans to almost quadruple its loans to 76 million yuan by 2012 and serve 15,000 households, with investment from companies, grants from international organizations and loans from banks, including the State-owned China Development Bank.

Farmers led China's first stage of reform after 1978, a golden age for rural advancement that ended in about 1993, according to professor Yasheng Huang at the Massachusetts Institute of Technology in Cambridge, Massachusetts. The financial sector has since evolved into a machine that feeds large State-owned enterprises and urban households at the expense of the countryside, he claimed.

The global crisis sharpened China's interest in microloans to address that problem. In May 2008, the central bank and China Banking Regulatory Commission issued a directive expanding to all provinces the establishment of microcredit companies focused on rural lending and explaining the conditions for raising capital and making loans.

Explosion in growth

That led to an explosion from eight companies in May 2008 to 500 now, according to GTZ, the German development-aid agency, which is conducting a survey with the central bank.

The central bank did not respond to faxed questions regarding the amount of microlending in China now and the government's target increase.

In March, the central bank and regulatory commission called on financial institutions to increase loans to rural areas and said they are developing new microfinance programs.

"The government is strengthening its work on this issue," said Long Zhipu, who runs Ningxia Huimin. "We must seize the opportunity."

Mao Yushi, an 80-year-old economist who established a microlending nonprofit in 1993, said migrant workers who've returned to their villages are good candidates for small loans. They understand how markets work because they lived in the more commercial coastal areas, "but they don't have money", he said. "If you provide microfinance, you can help them to set up local businesses."

Attracting investors

Still, some nonprofits that carry out such work don't know how to seek funding from banks or attract investors to what is a low-profit enterprise because of the cost of reaching scattered rural residents. Registration rules, requirements that vary by locality and a prohibition on taking deposits also limit the ability of microcredit companies to expand their scale.

Long says the government should facilitate commercial-bank loans to these companies and institute tax relief and interest- rate subsidies for them.

"Right now, the government doesn't know how to support it, and the microcredit companies don't know how to get support," he said.

Wang is lucky to live in one of the areas where China's microfinance experiment started. Her success has helped her qualify this year for a loan of 20,000 yuan that she is using to expand her business.

"I don't have any hardships now in my life," she said.

Bloomberg News

(China Daily 06/29/2009 page4)