Small lenders boom on mainland

PUBLISHED : Monday, 04 June, 2012, 12:00am
UPDATED : Monday, 04 June, 2012, 12:00am

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For Mr and Mrs Yang, a couple in their 60s, it did not seem like a difficult decision to make.

They withdrew millions of yuan from a savings deposit account with a major state-controlled bank in Beijing last month, and handed it to a private 'microcredit' firm, expecting to earn a 10 per cent annualised return on their investment.

A marketing team promoting the firm outside a supermarket last week had caught their attention, said Mr Yang. The promised return was attractive compared to the 3.5 per cent yield on a one-year yuan deposit rate offered by mainland banks and 3 to 4 per cent yield from treasury bonds.

'The interest rates on bank deposits and bonds are now minimal as prices of almost everything have risen recently,' Yang said.

'We've been looking for more reasonable returns for months.'

In the first four months of this year consumer inflation rose an annualised 3.7 per cent from a year earlier, according to the National Bureau of Statistics.

In April, the consumer price index rose 3.4 per cent from a year ago as vegetable prices surged by 27.8 per cent.

After a tour of the microcredit firm's office and conversations with its wealth manager, Wang decided his savings should be safe at least for a short period of perhaps up to a year.

The Yangs' money is now being managed by the microcredit firm, which matches demand for and supply of cash by lending clients' money to individuals - including business owners and urban white-collar workers - to provide short-term credit.

There are now more than 4,800 such microcredit firms on the mainland, a sevenfold rise over four years. At the end of last year, total loans outstanding climbed 87 per cent from a year ago to 369 billion yuan (HK$449 billion), according to the People's Bank of China.

The Yangs' decision helps to explain the decline in deposits at mainland banks despite a lacklustre stock market and a ban on purchases of second properties in big cities. According to the central bank, yuan deposits held by financial institutions in April fell 465.6 billion yuan from the same period last year.

Although private firms offering financial services operate in a legally grey area, they have mushroomed in the past few years by offering interest rates that better reflect market dynamics than the administered rates offered by mainland banks.

For instance, CreditEase, a Beijing-based firm, offers wealth management services to clients including wealthy people and extends loans to individuals to finance their spending or their businesses.

Since its inception in 2006, CreditEase has lent billions of yuan, profiting from an interest rate spread between the rates it offers depositors and the rates it charges borrowers at 10 to 20 per cent.

That wide margin has drawn the attention of venture capitalists. For example, CreditEase's investors include Kleiner Perkins Caufield & Byers (KPCB), the world's leading venture-capital firm, IDG Capital Partners, and Morgan Stanley Private Equity Asia.

Nevertheless, Beijing exerts a tight control over the financial sector. Indeed, the only bank founded by private firms is China Minsheng Banking Corporation, even though it has close ties to the government.

As banks usually favour government-backed firms, individuals - including urban employees and farmers - and small- and medium-sized private firms often face difficulties in accessing credit.

In a bid to better serve small firms and clients in underdeveloped areas and to help stimulate the economy, this year Beijing has encouraged the participation of private capital in banks and microcredit firms.

CreditEase is now seeking various financial licences to better serve its wealth management clients. As such, it is shifting its focus to become a comprehensive financial services provider, says founder and chief executive Tang Ning.

'We will have various models including insurance, trusts, and funds tailored to satisfy high-net-worth clients,' Tang said.

'We are participating in the Wenzhou financial experiment, trying to act as an intermediary agency to fund the local economy.

'The timing is good for further development as the top leadership has announced it will welcome private capital in the financial sector.'

The banking sector is among several industries that have opened up to private capital after the State Council last week announced measures to counter the current economic slowdown.

However, Xu Xiaonian, an outspoken economist at the Shanghai-based China Europe International Business School does not expect a boom time for private capital just yet.

'Only when the economy is in difficulty, does the government cry, 'Help me!' It usually keeps a tight grip over private capital,' Xu said.

Beijing previously announced that it would provide private capital with wider market access in the financial sector.

However, there has been little progress, as local governments seek to protect the local banks that they control from competition.

Interest rates on bank deposits and bonds are now minimal as prices ... have risen Mr Yang, investor in his 60s

40b yuan

The amount of net assets, in yuan, which Wenzhou aims to be managed by some 30 rural financial institutions by the end of next year