U.S. NGO: CHINESE GOVERNMENT MICROFINANCE PROJECTS

C O N F I D E N T I A L SECTION 01 OF 02 BEIJING 022413

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E.O. 12958: DECL: 10/24/2016
TAGS: ECON EFIN EAGR PGOV CH
SUBJECT: U.S. NGO: CHINESE GOVERNMENT MICROFINANCE PROJECTS
MAY DO MORE HARM THAN GOOD

Classified By: (C) CLASSIFIED BY MINISTER COUNSELOR FOR ECONOMIC AFFAIR
S ROBERT LUKE; REASON 1.4 (B) AND (D).

SUMMARY
--------------


1. (C) Representatives of a U.S.-based NGO that provides
business capital to entrepreneurs said that they are
concerned China's current focus on microfinance may do more
harm than good because government-sponsored projects threaten
to undermine NGO activity. They predicted increased interest
in microfinance given the recent awarding of the Nobel Peace
Prize to the founder of the Grameen Bank. The U.S.-based
organization remains hopeful that it will be able to find its
niche in China, but many of its Chinese employees are
discouraged by the group's lack of success to date. For now,
it remains unclear whether or not the Chinese government and
NGOs can cooperate to meet the huge unmet need for financial
services in rural areas. END SUMMARY.

HOPE CHINA BACKGROUND
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2. (C) Dave Larson, Director of Operations, HOPE
International, and Sarah Haig, HOPE International's
Beijing-based Technical Advisor (protect) met with Econoff on
October 16 after their return to Beijing from the border
between Hebei Province and Inner Mongolia Autonomous Region.
HOPE International is a global faith-based, non-profit
organization focused on poverty alleviation through
microenterprise development. HOPE China opened its first
office in the city of Zhangjiakou in Hebei in 2000.


3. (C) HOPE China has eight offices in Hebei and two in
Shanxi Province with 38 Chinese and four expatriate staff and
an annual operating budget of USD 160,000. Located primarily
in urban areas, HOPE China's offices provide business capital
to entrepreneurs who lack access to formal financial
services. Loans average RMB 4500 (USD 560),repayable over
90 days. HOPE China currently is focusing on designing
microcredit products for rural markets.

MICROFINANCE IS JUST A TOOL
--------------


4. (C) Larson is surprised by the Chinese Government's
current emphasis on microfinance. Having visited China in
his current capacity on six previous occasions, Larson stated
that many policymakers in China's Central Government do not
realize that microfinance is merely a tool for development,
and if misused, potentially could do more harm than good. He
also expressed concern that while microfinance has potential
here, there appears to be a considerable danger that
government-supported microfinance projects could undermine,
or in some areas, even crowd out non-government actors,
including international NGOs. Of particular concern, he
pointed to the increasing importance of the role played by
GONGOs (government-supported organizations) such as the China
Fund for Poverty Alleviation (CFPA) in the microfinance
effort.


5. (C) Larson stated that the Chinese Government's interest
in microfinance is likely to deepen now that Muhammad Yunus
has been awarded the Nobel Peace Prize for his contributions
in Bangladesh. This may encourage central and local
government officials to promote microfinance projects that
are not viable. Although demand for microfinance appears to
be high, the capacity for institution-building and delivering
these services are limited, they said, and ill-conceived
government supported projects therefore threaten to undermine
non-government or private sector alternatives. (Note: Yunus
is presently in Beijing at the Grameen International
Conference on Microcredit in China, co-hosted by the China
Academy of Social Sciences (CASS) and the Research Department
of the People's Bank of China (PBOC). PBOC has been an
increasingly outspoken advocate of microfinance in the past
two years. End Note.)

CHALLENGES TO PROMOTING MICROFINANCE IN CHINA
--------------


6. (C) According to Larson, further compounding the

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difficulties inherent in the Central Government's rush to
promote microfinance projects is that microfinance, in HOPE's
view, has not been very successful in China to date. Larson
commented that HOPE's own Chinese employees are a bit
demoralized that the organization's projects in northern
Hebei Province do not appear to be working as well as they
would like.


7. (C) In particular, HOPE has had a difficult time serving
the poorest of the poor in small cities and rural areas, Haig
said, because many of China's poorest citizens cannot
envision how to utilize the funds. Instead, many of HOPE's
microfinance loans ultimately go to small shopkeepers or
herders who have a plan on how to expand their businesses.
Government policymakers who do not understand this problem
and hastily design projects and allocate resources towards
microfinance projects in poor regions may do more harm than
good, Larson opined.

HOPE'S FUTURE IN CHINA
--------------


8. (C) Larson said that given the current policy environment
and difficulties to date, HOPE may consider going back to the
drawing board and starting over in China. HOPE still is
struggling to find its niche in China, but the organization
recognizes the opportunity presented by the lack of access to
credit in rural China, he said. Haig cited as an example
that in several of the jurisdictions where HOPE operates,
Rural Credit Cooperatives (RCCs),the financial institutions
designed to serve rural areas, have closed up shop due to
financial losses, leaving a huge pent-up demand for financial
services in the countryside.


9. (C) In any event, Larson and Haig agreed that it would be
interesting to watch how the Central Government, including
the PBOC, and NGOs cooprate on the micrfinance front in the
next cople of years. The Central Government is likely o
continue to emphasize microfinance and to expand projects in
the countryside, but HOPE remains concerned about the scope
of those projects and whether or not they ultimately will do
more harm than good, they said.

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