Lately, there has been a few noteworthy news pieces on China’s microfinance development.  Dr. Yunus announced at the Clinton Global Initiative that it will be starting a bank in Sichuan.  Jack Ma’s Alibaba is said to contribute $5 million to kick start lending.  Dr. Yunus has been trying to start a true Grameen Bank in China since 2006.  I am not sure if the small loan company license (小额贷款公司) has been issued yet, but you have to give them credit for trying.  Perhaps the announcement is to increase pressure for the government to hand over licenses quick.

Vikram Akula of SKS recently wrote an Op-Ed in the WSJ about opening up investments in MFIs in China.  He is definitely correct in pointing out that most casual observers who sees China as ‘developed’ and don’t need microfinance is wrong.  He is also correct that the sector needs to open up.  But I would have like to see what his ideas are in terms of liberalizing the sector.  Allowing foreign investment is definitely one option (which he is, of course, interested in), but what else can China do domestically?  Are there different models that he can share given India and SKS’s experience?  As he pointed out, current regulations do not allow MFIs to take deposits.  What then, are the risks of the MFIs?  What should MFIs who do not take deposits be aware of in terms of managing risks?

Lastly, a press release from from HSBC came out yesterday that it has partnered with Women’s World Banking (WWB) in provided microloans through its rural banks in China, specifically in Hebei’s Suizhou branch and Chongqing Dazu branch.  According to a Caijing article, the product is called “Happy Loans” (”贷款乐”).  The product has been piloting for 3 months in Suizhou and is currently being expanded.  What is WWB’s role in this partnership?  Is it providing operational expertise?  If so, does this mean that WWB (and perhaps MFIs in general) is better at assessing credit worthiness of low-income borrowers than a large multinational bank such as HSBC?  Or is HSBC simply outsourcing it’s operation activities to WWB?  From previous research, it seems that HSBC Rural Bank’s branches tend to focus only on export oriented areas (mostly exporting mushrooms actually), specifically for SMEs.  Are they moving away from SME finance and moving towards ‘real’ microfinance?  What are the terms of the loans?

Questions to ponder during my midterms.

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.