Happy Fry Tofu Seller in Beijing

China’s State Council just issued a draft ordinance that allows street vendors and other microentrepreneurs to register for permits and recruit employees legally. The draft ordinance, titled “Individual and Household Business Ordinance (Draft)” / “个体工商户条例(征求意见稿)“, will allow micro-enterprises to get access to loans from alternative sources such as small loan companies and village banks.

Previous requirements only allow business to be registered at its place of operation, which is impossible for street vendors and hawkers. Under the draft ordinance, entrepreneurs would be able to register their business under their place of domicile, no matter where they operate. The permission to register will be delegated to the local State Administration of Industry and Commerce (SAIC).

If registered as a “personal business,” the person and his/her personal assets will be liable for the business. If it is registered as a “household business,” then the entire household, including the household’s assets are liable for the business.

According to statistics from China’s State Administration for Industry and Commerce, individual and household business registrations have been raising rapidly. In the first quarter of this year, there were 1.5 million newly registered individual and household businesses, a 28% increase year on year. As of March 2009, there are 29.5 million individual and household businesses registered in China, which employs roughly 58.1 million people in total.

The individual and household businesses will be allowed to engage in various industries, including wholesale, retail, hospitality, food and beverage, manufacturing, transportation, warehousing, post, agriculture, fishery, animal husbandry, construction, mining, and services.

Under the proposed draft ordinance, individual and household business will also be able to recruit employees legally. In the past, these businesses were only allowed to have one to two assistants or three to five apprentices if skilled labor is involved. Such measures would help migrant laborers get employed at small and micro-businesses with some protection.

Along with the proposed ordinance, there is a stipulation that no one can collect “management fees” or “bazaar fees” from individual and household businesses. Associations fees are allowed as long as it is voluntary. I wonder if this clause is included to snub existing extortion that commonly affect street and market vendors.

Yet not all of it is rosy. Along with registration, is responsibilities: taxes. After microentrepreneurs register they must also keep proper books and file for taxes like other businesses. Or else, fines can range from 100 to 1,000 RMB.

More information on the ordinance, in Chinese, can be found here.

Photo Credit: FXCaliber

The Chinese government is so eager about it, it has tried to promote it (by my count) seven different times: Rural Credit Cooperatives, Agricultural Development Bank loans, Microcredit Companies, Village Banks, Rural Mutual Credit Cooperatives, Small Loan Companies, and Postal Savings Bank loans.

The private sector is also excited with thousands of registered guarantee companies and small loan companies. Not to mention the hundreds of companies registered with consulting / management licenses that engage in lending-like business model.  With the latest round of government push for microfinance to help the rural poor and the unemployed, even web entrepreneurs are jumping in for some action.  Many of these online sites are throwing around the word “microfinance” along with “P2P lending” and “social responsibility” for added chic.

But are they really microfinance?

A quick browse through their websites demonstrates otherwise.  While most might associate microfinance with loans for the poor farmer, these Chinese “microfinance” websites tend to target the urbanites and youth of China.  Instead of funding income generating activities like animal husbandry or farming, their loans are mainly for consumption.  One website encourages loans for purchases of digital products, home appliances, piano, home renovation, tuition, and even gym membership!  Another website, called “ChinaMFI.com”, makes loans for hawkers, taxi drivers, study abroad, tuition, vehicle purchases, and bank loan collateral. How did sub-prime lending start again?

The misuse of the word “microfinance” probably has to do with the lack of a clear definition in the Chinese context in combination with the market demand for credit in China.  Many view microfinance as providing credit to those who lack formal access to credit often referred to as the “unbanked.”  Due to marketing, serving the “unbanked” became synonymous with microfinance.  In many developing countries, the unbanked and the poor are often the same group.  In China, however, it is often not the case.  The Chinese poor are indeed unbanked, and outside of mortgages and car loans, so is the Chinese middle class and its entrepreneurs.

As one of the final few industries that have yet to go under serious market reform, the banking sector is still heavily dominated by the state.  The state-owned banks account for 53% of total bank assets.  Moreover, the state-owned banks prefers to lend to state-owned enterprises, who dominated over 80% of bank loans.  This predicament has left everyone else from small and medium enterprises to micro-enterprises and individuals starved for credit.

The loans from these supposed online “microfinance” companies is just meeting the demand for private credit which is severely undeserved .  However, calling them “microfinance” is inappropriate.  They should be called SME loans or individual loans instead.  As an industry stand, microfinance as defined in the CGAP Microfinance Consensus Guidelines is “the provision of banking services to lower-income people, especially the poor and the very poor.”

By calling what they do microfinance, these online loan companies severely damages the credibility of microfinance in China.   It would be seriously tragic if people associate microfinance with someone’s gym membership instead of a farmer’s needs to buy a few chickens to make ends meet.