Bringing Financial Services to the PRC’s Poor Will Boost Poverty Reduction

A woman with a wagonload of harvested crops in Guangdong, PRC.
A woman with a wagonload of harvested crops in Guangdong, PRC.

By Seung-Min Lee

The PRC has achieved remarkable economic growth, but serious imbalances between regions and areas remain. The government is aiming to bridge these gaps by developing inclusive finance tools.

The People’s Republic of China (PRC) has achieved remarkable economic growth, but there are a number of serious imbalances between coastal and inland regions, and between urban and rural areas. The government wants to help bridge this gap by developing inclusive finance tools.

Rural finance in the PRC remains the least developed part of the country’s finance sector. Lack of competition in the sector, inconsistent regulation, market entry barriers, and institutions subject to many restrictive requirements that have unclear foundations, have all contributed to this situation.

ADB has a long history of operations in microfinance, but more importantly has been heavily involved in overall financial sector development and has accumulated knowledge and experience throughout many of our developing member countries. ADB therefore has the expertise and means to address specific microfinance sector issues, yet at the same time can do this taking a wider financial sector development perspective, linking a series of necessary reforms and development programs through different modalities.

Although broad financial sector development will help more efficient allocation of capital for different sectors and segments of society, the focus should be on microfinance sector development to more directly address the underserved – especially rural and poor households, and small and medium-sized enterprises.

Rather than a one-off effort, the approach to microfinance sector development has to be long-term and holistic, something ADB has been trying to do over the last decade or so in the PRC. The target has not been to carry out a specific project or program, but rather to play a catalytic role to attract private sector capital, help establish microfinance infrastructure, and introduce best practices.

ADB actually blazed a trail in this regard in the PRC by supporting the creation of private sector-owned microcredit companies (MCCs) through a pilot program in 2004. This has since been replicated nationwide. The national MCC market has grown remarkably from just seven institutions in 2006 to 8,791 MCCs with CNY942 billion ($151.7 billion) in outstanding loans by end of 2014, providing financing to people with limited access to conventional bank finance. Throughout this period, ADB has supported the development of microfinance and the MCC sector through regulatory, financial market infrastructure, and policy and legal support.

While our role and focus will remain unchanged, we are now witnessing exciting opportunities and changes in microfinance based on technology innovation in the PRC.

For example, huge e-commerce platform and service providers such as Alibaba and Taobao have started providing microfinance services using their Internet platforms. The TaoBao platform has 16 million participating vendor businesses, nearly 90% of which are small and microenterprises that have difficulty accessing finance to fuel their growth. 

Alibaba has built its own credit scoring model based on online activity, using big data to understand client behaviors and characteristics, and to offer responsive financial services, overturning traditional banking models, and leveraging the group’s cloud computing services to keep response time to customers fast and operational costs low.

Development agencies such as ADB need to respond to, and be ready, for these innovations. While promoting and utilizing this kind of innovation for sector development, the legal and regulatory uncertainties and challenges need to be studied and properly addressed.