Frequently Asked Questions

What is meant by the term “micro-entrepreneur”?

In China, the definition of what is meant by the term “micro-entrepreneur” includes “individual worker”, “individual entrepreneur (getihu)”, and small-scale private enterprises. The individual worker category includes those who have not registered with the relevant government departments, and are likely to be self-employed or giving employment to family members, like farmers, small processing business owners, etc.

What do we mean by “Getihu”?

Getihu usually means a small business owned by a single proprietor. These individual businesses cannot employ more than eight people and are commonly the vehicle of choice for the self-employed. Although getihu businesses are owned by private individuals or households, and registered with the local office of the State Administration of Industry and Commerce, they do not constitute a legal person as such, and are therefore excluded from the category of formal “private enterprises” for statistical purposes.

What kinds of companies are thought of in China as being “small” or medium?

Definitions of what is meant by “small” companies are hard to come by, and certainly not standardized.  For our purposes, based on our experience here, we will use as a rough and ready definition companies whose annual turnover is less than five million RMB (about EUR468,100) and which employs between 6 and 50 people.) There is virtually no definition of medium-sized enterprises – but a general rule of thumb is that what China calls “medium-sized companies” will be considered “large” in the US or Eureope.

Do you have any statistics on private enterprises in China?

According to the statistics issued by the State Administration of Industry and Commerce (SAIC) for the end of 2006, the number of registered private enterprises numbered 4.94 million, representing an increase of 15% over 2005; this is 57.4% of all enterprises registered in China. Total registered capital for the private sector came to RMB 750 trillion¹ , a 22 percent increase over 2005. The number of people participating in private enterprises in 2006 was almost 64 million, an increase of almost 10 percent over the previous year. Of these, roughly 51.7 million were employees, which was another almost 10 percent increase over the previous year.

Do you have any statistics on “getihu” in China?

Registered getihu numbered 25.76 million at the end of 2006, as opposed to 24.64 million by end-2005. Registered capital associated with these businesses came to RMB651 trillion, a 12% increase over 2005. The number of people involved in the individual entrepreneur sector came to 50.45 million, an almost 3 percent increase over 2005. Up until to the end of 2006, only about 35% of the country’s GDP was derived from state-run enterprises and those in which the state holds majority stakes; privately-run enterprises stood for roughly 40 percent of GDP.  According to the SAIC analysis, 70-80% of incremental growth in the Chinese economy came from the private sector that year.

How do small companies in China typically finance their activities and growth plans?

Given that the PRC’s private ownership is still dominated by small firms, raising capital on the domestic equity markets, which until recently were still subject to stringent regulations and quotas for listings, is impossible for most of them. As a consequence, the tremendous growth of these domestic private firms has been financed mostly from retained earnings, such informal credit sources as personal networks, and extensive use of trade credit. The capacity to rely largely on self-generated funds for new investment ultimately is limiting the speed at which these small private firms can grow.

What are some of the obstacles faced by small companies looking for financing support, and what is the Chinese government trying to do about these problems?

Typically, because the small and medium-sized company phenomenon has not been around very long in China, and because such smaller or private organizations have few defenses against risk (compared to state-backed organizations), there is a hesitancy about granting them loans that are not fully backed up with guarantees or collateral. In addressing this issue, the People’s Bank of China began in 2005 to organize several awareness-raising conferences to kick off market research into the demand for financing, and development of new financing mechanisms. Thus recognition of the need for what the World Bank calls “bottom-up capital formation” really only started in 2005, and leading up to a series of SME-awareness raising events in 2006. Events during 2005-7 have underlined the importance of the SME segment for creation of employment, but unfortunately the big four banks (Commercial and Industrial Bank of China, Bank of Communications, the Construction Bank of China, and the Bank of China)  have continued to show little willingness to do the extra risk analysis work needed to cater for this segment. ²

What other initiatives have been launched to make it easier for small companies to access financing? For instance, what was the People’s Bank of China MCC pilot?

At the end of 2005, the PBOC announced its pilot microfinance project in four provinces and the Inner Mongolia Administrative Region. Under this initiative, companies with a minimum registered capital of RMB5 million (EUR 468,164) would be allowed to make individual loans with a value ceiling of no more than 5 percent of their total registered capital. These companies, commonly referred to as Micro-Credit Companies (MCCs) are classed as non-financial lending institutions, and they cannot accept savings from the public.

What is the PSBC, and how is it related to the Chinese post office system?

The PSBC’s intention to gradually turn itself into a bank was announced late in 2005, and this was widely interpreted to be the move most likely, eventually, to bring financing to the rural areas and to serve the small company market at the same time. PlaNet Finance China strongly believes that the PSBC is the natural delivery network to fill the current gaps in micro-, small and medium enterprise financing, but the challenge ahead is to transform it into a more commercial culture that resists the temptation to try to apply a national loan format template over the whole country. The huge resources of PSBC (thanks to its mega-savings and remittances) ensure that it has the capacity to beat out most competition, especially the Rural Credit Cooperatives that would normally be its natural competitor in the rural areas.

What is the “Village Bank” initiative?

In 2007, the China Banking Regulatory Commission issued its own “Provisional Regulations on Village Banks”, which enabled village banks to be set up in China’s county towns and districts in rural areas. The basic structural requirements specify that a banking financial institution must the majority shareholder, and cannot have less than a 20 percent stake; other partners, which can be individuals or other kinds of legal persons cannot hold more than 10 percent of shares apiece. This unwieldy structure has unsurprisingly not attracted much interest from potential non-banking shareholders, but it has presented an easier way for established banks to wholly-owned village bank “branches”. According to our understanding, these village banks are tending to be settling into fourth- and fifth-tier cities rather than into purely rural areas, and the loans they are distributing are tending to be geared to small businesses; this is good for the funding-starved small companies, however it is not fulfilling its original mandate to get financing to potential farmer clients in the rural areas.

What is the main downscaling program going on in China today?

Cooperation between the World Bank and the China Development Bank (CDB) was designed to  offer technical assistance to 19 carefully-selected city commercial banks in China. To expedite this, the project accessed USD100 million from the World Bank, in addition to related technical staff 2005. These loans are tending to span across from microfinance to higher values more targeted to the small company market, with a likely range being RMB100 to RMB500,000. This work, undertaken by consultants at the Internationale Projekt Consult GmbH, was halted in July 2008 as CDB elected to review the priorities of the work.

How is the National Development and Reform Commission involved in reform of SME financing?

Very recently a new player has become involved in the effort to get financing to the SMEs: the National Development and Reform Commission (NDRC).³ To this analyst, the involvement of NDRC speaks volumes about the unwillingness of the banks to take on the SMEs without some form of risk cushioning from the government. The following statistics and emerged from the NDRC during the Guangzhou conference announcing that NDRC will be in charge of planning to create a special bank to support SMEs:

• The government will continue to support SMEs by subsidizing the cost of using the services of loan guarantee services in securing bank loans;
• Via the Chinese Treasury, SMEs can access funds (RMB3.5 billion in 2007) dedicated to technology innovation to help them climb the value chain.
• Total lending by commercial banks during the first quarter of 2008 came to RMB 2.2 trillion, of which only RMB300 billion was extended to SMEs.⁴

What are some of the issues and challenges facing the Chinese banking sector in general, as of mid-2008?

• During the first seven months of 2008, restricting lending, and reducing excessive liquidity have been major priorities. Banks’ reserve ratio requirement was recently hiked up again, the fifth time in one year. This move is specifically directed at controlling the growth in lending. Toward the end of July, the “stop-go” policy reversed itself as the authorities came to realize that the SME sector, which should be adding the most growth to the economy, had been drastically hit by the tightened loan policy.
• According to the central bank, annual credit growth has slowed, from 18% to 15%, but working against this is the continual accumulation of foreign currency, an inflow that suggests the more rapid appreciation of the RMB currency this year, which is in turn aggravating the excess liquidity problem.
• The central bank has been unwilling to raise interest rates again after a succession of such moves. According to some economists, the investment rate remains high because interest rates are low; the central bank is unwilling to further raise rates because it fears massive destabilizing inflows of speculative capital.
• Negative real interest rates have not stopped growth in savings deposits; however, low returns on savings are not helping to help progress another major priority: to boost household income and thereby stimulating consumer spending. At the end of 2007, savings stood at RMB40,105 billion (USD5,850 billion) in the banking system.
• Trust and investment organizations, once discredited after several bankruptcies in the late 1990s, appear to be making a comeback as providers of more flexible financial services, especially to the high-wealth and institutional sector; they are attracting savers as well as foreign investors.⁵
• The goal of re-balancing policy is to increase the proportion of consumer spending in the country’s GDP, thus having spending veer away more from capital investment and export enabling; however, as of 2007, household consumption accounted for just 35% of GDP, a new low. In contrast, investment accounted for two fifths of GDP.
• All the major banks recorded high profits for 2007 but forecast that 2008 would be a tough year. A first sign of coming trouble was the slight rise in Non-Performing Loans (NPLs) recorded during the fourth quarter of 2007: The combined NPLs of the Bank of China, ICBC, China Construction Bank, and the Agricultural Bank of China rose by about 8 percent; a lot of this was due to the exceptionally bad results of the ABC, with RMB816 billion in losses.

What are the barriers to accessing finance for small companies?

Typically, banks seek to control their loans business by adjusting interest rates; however, demand is such in the China market that such manipulations of interest rates lose relevance: countless enterprises are willing to pay interest rates pegged way above standardized norms, but it is of no use: the bank’s analysis is that whatever the enterprises can pay in the way of interest rates is not going to compensate for potential losses if they default and have no strong guarantee or collateral. For the most part, small- and micro-enterprises are not able to furnish collateral big enough or safe enough to reassure the banks; the result is that the banks see small clients only as potential loss-makers. The banks’ traditional loan-delivery mechanisms are not adapted to financing micro-, small- and medium-sized enterprises.

How do weaknesses in the banking system discourage banks from downscaling?

Chinese commercial banks often lack specialized departments and staff to target these sub-groups of potential clients. It is also a capacity problem. A major gap area is skills training specifically for SME-related credit risk management and analysis. Lack of credit scoring technology is a major obstacle to willingness to take on more MSME-related work; on the MSME side, lack of transparency in governance structure can make analysis difficult in China. The capital market lacks financing specially adapted to SMEs.  Risk-based pricing is undeveloped; if an SME proposal doesn’t fit under the larger traditional corporate grid of tests, it tends to be rejected. There are therefore many elements that do not join up. The PSBC has the opportunity to fill this gap if it is willing to inject precisely the knowledge and praxis currently not being adopted by its peers.

Which players seem to be waking up to the potential of the small company market?

Leading the charge on SME banking are typically not the big four state banks, but other banks that started out as regional financial institutions and city commercial banks, which often come under pressure from local governments to support local companies.

• Others, including Harbin Bank, were introduced to the possibilities of the smaller-loan market by laid-off worker programs, and which wishes to pioneer new technologies to tackle MSMEs not only in Harbin, but in cities across China;
• Such leaders include the Bank of Beijing, which was recognized by the CBRC as the “Role Model for All Banking Financial Institutions  in SME Lending in 2006” – known for its “Little Giant” financing program. Founded in 1996, it is a joint-stock commercial bank with 125 business outlets in Beijing and one branch in Tianjin.
• Also recognized for SME lending and overall competitive excellence is the Shanghai Pudong Development Bank. By the end of 2007, this bank has outstanding loans worth RMB 551 billion.
• The “model SME” Bank:  Business Development Bank. This is China’s first solely foreign-funded bank, established in Shanghai in 1992, which transferred all its shares to America-based United Commercial Bank (UCB) as the bank prepared to turn itself into the first SME-loan oriented bank in China. Late in 2007, the IFC disclosed it was lending USD45 million to the bank to extend the reach of the network along with the loan volume. IFC and UCB have been working together on building capacity of the bank and broadening the bank’s geographical coverage.⁶
• Most of the City Commercial Banks across China do this business to varying degrees.

^[1] This is the US convention, under which one trillion = 1,000 billion
^[2] Instead, some have apparently moved into “easier” but much more risky moves in their efforts to cater for wholesalers and other small businesses, issuing multiple credit cards and encouraging indebtedness (from PLaNet Finance China field notes).
^[3] “Top Economic Body Mulls Bank for SMEs”, China Daily Business News August 5, 2008.
^[4]  CBRC figures
^[5]  FT July 9, 2008 “Banks place faith in China’s Trust companies.”.
^[6] China.org.cn “IFC loan to help Chinese small-and medium-sized enterprises”