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Growth of micro-credit may cut assets bubbles

Growth of micro-credit may cut assets bubbles

Write: Rosario [2011-05-20]

BEIJING - If companies that lend micro-credit loans can develop well in China, they may attract capital from the real estate and the stock markets, which may help reduce assets bubbles and benefit the macro economy, said economist Mao Yushi on Oct 31 at the All-China Financial Affairs Offices Development Forum.

A total of 800 billion yuan in floating capital in Wenzhou need to find their way for further appreciation, and micro-credit loan companies will be one channel, said Zhou Dewen, president of the Wenzhou Small and Medium Enterprises Development Association and also a part-time professor at Peking University and Zhejiang University.

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Micro-credit loan companies, which lend to farmers, self-employed businessmen, and micro and small enterprises at high interest rates, were allowed to set up nationwide in China in 2008 on a trial basis. But because micro-credit loan companies operate somewhat like loan sharks and have been labeled by some as immoral or exploitative, they still face scrutiny from regulators and even the public.

However, Mao said micro-credit loan is not exploitation because it allows money from wealthy people to be used by poor people and enables poor people to turn their labor into wealth. The poor, most of whom are farmers, have rare access to bank credit in China and their labor is not fully explored.

To make these micro-credit loan companies function well in a sustainable way, high interest rate is necessary, Mao said.

The best way to lower the interest rates of micro-credit loans and make them more affordable for farmers and micro-entrepreneurs is to channel more capital into this sector, Mao emphasized.

If more capital flows into the micro-loan sector, the supply will be increased and the price of these loans (interests paid) will be lowered, said Mao.

However, different attitudes and policies from local government will, to a large extent, determine how micro-credit companies will develop, an official from a provincial financial affairs office told chinadaily.com.cn, but declined to be identified.

Only one micro-credit loan company is allowed to be set up in each county of Wenzhou, and the registered capital can be as high as 200 million yuan, exceedingly higher than the legal requirement of 5 million yuan, according to Zhou Dewen. Wenzhou is a city in East China's Zhejiang province, where entrepreneurship is flourishing and people have a sharp sense of investment. These kinds of restrictions may lead to corruption and hinder the development of micro-credit, he added.

But there are no such restrictions in some other places, such as North China's Inner Mongolia autonomous region.

Economists like Mao are worried about how micro-credit companies can break the bottlenecks like capital enrichment to scale up because they are not defined as financial institutions and cannot attract individual savings and are prohibited from fundraising in many ways. But micro-credit companies in the Inner Mongolia autonomous region can use every means that can be used by an ordinary company to enlarge the capital base, such as private entity investments and floating, said Song Liang, director of the financial affairs office in the autonomous region, which regulates micro-credit companies.

For micro-credit loan companies, the cost to gauge farmers' willingness and ability to repay is too high, but Inner Mongolia has found solutions for this encouraging farming-related businesses to set up micro-loan companies because they know farmers well.

Companies like Huhhot-based Mengniu Dairy Group and Baotou-based Little Sheep Group Ltd, which manages hot pot chain restaurants, have both set up their own micro-credit loan companies.

Micro-loan companies in different areas should enhance communication on how to bargain for more room to develop since there is flexibility in policies such as taxation, said Li Yanqiu, general manager of Jinyue Micro-credit Loan Co Ltd at the Gongchangling district in the city of Liaoyang, Liaoning province.

She added that companies should also exchange ideas on how to solve problems concerning management because this sector is still immature.