Reforming the Countryside: Micro-Finance in Guangxi

UNCLAS SECTION 01 OF 03 GUANGZHOU 000466

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EB/TRA, AND EB
STATE ALSO PASS USTR FOR CHINA OFFICE

E.O. 12958: N/A
TAGS: EFIN EAGR PGOV SOCI ECON CH
SUBJECT: Reforming the Countryside: Micro-Finance in Guangxi
Province


1. (U) Microfinance is on the rise in Guangxi, as commercial banks,
rural credit unions and non-governmental organizations (NGOs) expand
their lending programs. Banks are eager to make rural finance
profitable. The area's dominant rural credit union complains that
defaults continue to be a problem. NGOs comment that government
restrictions remain tight; the balancing act is figuring out far to
push the envelope in expanding operations, without clear legal or
financial parameters. For now, the Guangxi government seems content
to give microfinanciers space to expand but offers little support.
A major expansion of microfinance in Guangxi is unlikely without
significant reforms that balance both political goals, and financial
growth. End summary.

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Return to the Countryside! Commercial Bank Reform
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2. (SBU) Some commercial banks are giving the rural sector a second
look, thanks in part to emphasis from the central government to
support its 'New Socialist Countryside' policy. In 2005, the
Agricultural Bank of China - Guangxi (ABC-GX) shut down its rural
micro-lending program to focus on the urban sector in an attempt to
maximize profits. However, the bank renewed its commitment to rural
finance in November 2007 and revived its loan program by providing
loans to sugarcane farmers in Congzuo municipality and to rattan
product weavers in Hechi municipality, the program's pilot sites.
According to Jiang Wucheng, Assistant President of ABC-GX, the bank
now views rural finance as a large market with profit potential, a
vast change from the bank's previous outlook. Jiang told us that
the bank's motivation has shifted from 'poverty alleviation' to
'supporting rural development,' hinting at an increasingly
commercial focus.


3. (U) Under the new program, rather than target average households
and farmers as before, lenders are giving preferential treatment to
agricultural companies and "model" farmers and households (i.e. high
profit producers). In the past, commercial rural credit loans for
households averaged RMB 1,000 to 3,000 (about USD 150 - 440); now,
loans are RMB 3,000 to 5,000 for average households and RMB
tens-to-hundreds of thousands for "model" recipients. In addition,
the Bank has also created new loan models such as "company + farmer"
guarantees and joint warrants from multiple households to lower
financial risks. From December 2007 to July 2008, the bank issued
RMB 10.21 million (USD 1.5 million) in loans and 236,000 credit
cards to farmers. The Bank plans to expand its programs to several
additional locations throughout Guangxi by August/September 2008.

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Rural Credit Unions Feel the Crunch
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4. (U) Most of Guangxi's rural finance programs are administered by
the Guangxi Rural Credit Union (GX-RCU). GX-RCU absorbed much of
the commercial banks' rural business in the nineties when they
shifted focus to the urban sector. GX-RCU issues loans to
independent households and collective guarantee groups, averaging
between RMB 1,000 and RMB 5,000 (USD 150 - 740),on a one-year
repayment plan. For the last three years, GX-RCU has maintained the
largest level of rural financial deposits in the province. Nearly
one-third of Guangxi's 9.3 million households are GX-RCU clients,
and it accounts for 90% of Guangxi's small credit business. Like
many microfinance providers, the Guangxi Rural Credit Union also
offers services in addition to micro-lending and credit --
investment advice, financial risk analysis and a youth
entrepreneurship program.


5. (SBU) According to Ban Bizhong, General Manager of the GX-RCU's
Credit Planning Department, the Union's small credit programs face
several obstacles. The largest is loan defaults. Ban complained
that many loan recipients migrate to urban areas after receiving
loans. While commercial banks are able to transfer non-performing
loans to other banking institutions, GX-RCU has to absorb the high
financial costs itself. Annually, an average 20% of GX-RCU loans
are not repaid on time and/or in full, with little improvement.
These problems have been exacerbated by the general risks associated
with the agricultural sector; this year alone, Guangxi has suffered
harsh winter storms and flooding. Despite these challenges, the
government has encouraged GX-RCU to increase support to poor farmers
by 17%, without offering significant assistance.

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A Question of Status: NGO Operating Challenges
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6. (SBU) Guangxi has not experienced the kind of growth in NGO
microfinance institutions that other provinces in China have.
However, two micro-lending NGOs that already operate in Guangxi hope
to expand their reach. In 2000, World Vision, a Christian relief
and development NGO headquartered in California, began a
microfinance program in Guangxi's Baise municipality, which has been
the scene of past land disputes. The program works with 220
households in six villages. Under it, households voluntarily invest
their money into small credit programs, with the organization
matching up to 70% of the group's investment. The money is then
loaned out in amounts of up to RMB 3,000 (USD 441). The other NGO,
the Guangxi Women's Federation's Poverty Alleviation Program, offers
a small credit program to local women. From 1997 to 2000, the
program assisted 150,000 households and distributed RMB 150 million
(USD 22 million) in loans, ranging from RMB 1,000 to 5,000 per loan.
Both organizations plan to expand in Guangxi either by volume of
loan recipients, or by branching out, in cooperation with local
government, to Ziyuan, Longsheng, Guilin, and Congzuo
municipalities. (Note: The Women's Federation is a unique NGO
because it was originally backed by the Communist Party of China;
therefore, the Federation's activities are largely encouraged by
local government. Many NGOs are normally prohibited from officially
registering, and operate under the radar. End Note)


7. (SBU) NGOs not affiliated with the local government face many
challenges in entering Guangxi's rural finance sector, the first of
which is legal status. World Vision, for example, is legally
registered in Hong Kong, not Guangxi. While Guangxi allows the
World Vision to operate, the local government has assigned the
Poverty Alleviation Office to keep close tabs on the organization's
activities. Based on previous incidences of rural finance scandals
in the 1980s, local government remains suspicious of NGO lending.
As a result, World Vision is not allowed to fund-raise in China but
must instead acquire its entire budget from overseas. Kelvin Yau,
Deputy Director of World Vision China, told us that he is acutely
aware of the delicacy of the relationship between his NGO and the
local government and that World Vision keeps its operations limited
in size to avoid raising concerns among local officials. For Yau,
the balancing act is figuring out far he can push the envelope in
expanding operations, without clear legal or financial parameters.


8. (SBU) In addition to legal status, World Vision has also faced
the challenge of getting farmers interested in its credit. Yau says
that many farmers within targeted villages are skeptical of the
benefits of microfinance, especially from a foreign organization.
Many in the countryside have become accustomed to free, sporadic aid
offered by the local government, rather than conditional lending
that requires a level of accountability to one's community.
Farmers complain that conditions for receiving micro-loans are too
harsh, such as interest rates that at 10-12% are higher than rates
offered by banks. For NGOs, the challenge is educating farmers
about the sustainable benefits of microfinance.


9. (SBU) Defaults have been a problem for World Vision too. It has
a policy that if rates get too high in any one village, the NGO will
cease operations there.

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Governmental Disconnect: Policy versus Practice
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10. (SBU) For the Guangxi government, microfinance is permitted
because of the public benefit it provides but support is minimal.
According to ABC-GX's Jiang, the local government has not provided
any favorable policies or tax incentives to encourage microfinance.
Thus far, reforms in Guangxi, including the expansion of commercial
banking back into the rural sector, have been dominated by
political motivations from above, rather than market forces and
sound provincial financial policies. Financially speaking, GX-RCU's
Ban commented that Guangxi's budget was limited in its ability to
support microfinance programs, other than subsidizing interest
rates, in spite of claims that the government had set aside more
money for poverty alleviation efforts. In addition, Jiang says that
commercial banks also face an "unsatisfactory" lending environment
in the more risky rural sector without policy reforms to support the
expansion there.


11. (SBU) Despite a lack of policy support, the local government and

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commercial banks have confidence in the rural sector's potential in
the long term, according to Jiang, but the government plans to let
the market be the driving force in the growth of rural finance.
However, a major expansion of microfinance in Guangxi is unlikely
without significant reforms that balance both political goals, and
financial growth.

GOLDBERG