Can China´s financial systems become more inclusive? – Sara Hsu

China announced in 2013 reforms of its financial systems so that rural areas and smaller companies, always denied access to capital, get more access. But the results are very mixed, writes financial analyst Sara Hsu in the Diplomat.

Sara Hsu:

Extending loans to SMEs and micro-enterprises has also been an important policy item. SME financing has been intermittently prioritized by the central government in recent years. Measures to improve SME funding include the establishment of microcredit companies, creation of credit guarantee companies to guarantee SME loans, planning of a national social credit system to provide credit scoring, and targeted lending by the Ministry of Finance. Micro-credit institutions have catered to SMEs, micro-enterprises, and other rural borrowers since 2008. Credit guarantee companies have guaranteed SME loans to increase bank lending to these firms, with some success. A social credit system will be introduced in 2017 to ensure that individuals and institutions can be rated based on available credit data. Ministry of Finance lending has targeted SMEs that fall into specified policy categories. As part of the recent attempt to roll out the inclusive finance policy, banks have been further encouraged to lend to SMEs. In addition, bank loans to SMEs will be securitizable to control risk and increase funding flows to this underserved sector.

Despite these measures, a dearth of funding persists for poor, rural borrowers, as it does for SMEs and micro-enterprises. It is not clear that the recent push to make finance truly inclusive is a break with past policies that have had limited success. For one, banks often try to refrain from lending to underfunded groups since they are higher credit risks. Venture capital and private equity investors may be reluctant to invest in rural areas due to the lack of human capital and to insufficient innovation found in these areas. While some of the policies that have been or are being carried out are certainly beneficial, including the rollout of the social credit system, tax breaks for rural lending, and securitizing SME loans, these may not represent the whole answer to the inclusive finance problem.