Lending solutions

Though Bangladesh-based Nobel Prize winner Mohammed Yunus started the micro credit mechanism more than 30 years ago, it has taken roots in China only recently. Bai Chengyu, secretary-general of China Association of Microfinance, says China is at least 20 years behind India in terms of micro credit. "In many countries such as Bangladesh, it has become a large-scale industry, but in China, it has just started."

Tang Ning was one of the early entrepreneurs who realized the potential of MSE financing. After working in Wall Street for several years, he returned to China and started CreditEase, a company that gives loans to MSEs.

Tang says that his company often searches for the tiniest of clients, be it villagers borrowing money to raise chicken, or barbershops in the back street and even restaurants making noodles or dumplings. "This is a business that no bank would ever consider doing," he says.

Tang calls his business as "inclusive finance" as it covers groups that are traditionally excluded by banks. He says MSEs are the cells of China's economy, and what he does is to transfuse blood to cells of the world's second-largest economic body.

With the urbanization process accelerating, Tang now sees more opportunities in villages than in cities. "The rural market is in no way smaller than the urban market," he says.

The company once loaned several thousand yuan to a woman from Ningxia to start a sunflower oil business. After a good harvest, the entrepreneur applied for new loans to raise sheep.

But that does not mean that Tang extends loans to just anyone. To control risks, the company is extremely cautious when loaning to industries related to steel trading and other low-value-added, export-oriented businesses.

CreditEase was established in 2006 and since then its business has been growing steadily by 50 to 100 percent every year. It currently disburses loans of more than 10 billion yuan every year. Even during the dark days of the financial crisis in 2008 and 2009, micro-credit companies overseas enjoyed good returns on their investments.

"Previously, the engine for economic growth was real estate and the 'demographic dividend' generated by cheap labor. But in the future, we should count on MSEs and the associated financing systems," Tang says.

"When the credit systems are established there is more trust between the lenders and the borrowers. It will also lead to more financing channels for MSEs," he says.

Gao says it is understandable that many banks are not willing to loan money to MSEs because there are cases that some MSEs would take loans and vanish.

"Entrepreneurs should not just complain about the policies, but also have the ethics to return the money, so that the credit chain does not break."

Tang says that institutes, governments and legislators need to work together to create a good credit society.

"Schools should open classes stressing the importance of credit, and legislators should make the violators pay a high price. In a more trustworthy society, capital can flow more smoothly, and MSEs can have more space to grow."

Big transformation

According to a recent report by Roland Berger Strategy Consultants, Chinese private companies do not have equal access to the market, investment, or research and development, as the state companies do.

"Based on our observations, we can say that unless we guarantee opportunities for small companies, the overall performance of the country's economy will be affected."

The report cites the Fraunhofer Society in Germany as a possible solution. The society is sponsored by the government and enterprises and has become a major innovation body dedicated to serve small enterprises in Germany.

With 60 branches across the country, the society does research and development in several areas including chemical products, electronics and optical instruments. The R&D centers are closely tied with the needs of MSEs.

Hans-Jorg Bullinger, former president of the Fraunhofer Society, says their guideline is to detect the industry that has the potential to grow, and then take care of them.

"Innovation should cover companies of all sizes, rather than being a privilege for high-profile companies. Germany's flat, industry-oriented innovation system can be a reference for China," the report says.

The Chinese government is well aware of the problem and has responded with a series of policies. According to a spokesman from the Ministry of Industry and Information Technology, the ministry is addressing the biggest hurdles for MSEs: business-model transformation, financing and tax burden.

"We aim to encourage a batch of MSEs and SMEs to reach the top of the value chain, and enter the strategic industries in China."

In the 12th Five-Year Plan (2011-15) for SMEs made by the ministry, it will come up with six key benefits for SMEs, including plans on intellectual property protection, financial support and cooperation with institutes on innovation.

But these efforts are not enough for the survival of SMEs, as they need to build competitiveness by introducing modern management, innovation and quality-control systems, analysts say.

Contact the writers at wangchao@chinadaily.com.cn and liulu@chinadaily.com.cn

(China Daily European Weekly 06/28/2013 page1)