COMMENTARY

------By Leo Michaels

Going hand in hand with China's economic growth has been the gradual diminishment of poverty across the country. One of the happiest consequences of China's opening up to the world is that, over the course of a generation, millions of Chinese people have been able to lift themselves from poverty by taking advantage of their country's nascent affluence. Poverty alleviation, on such a scale, is rare.

The benefits have not trickled down to everyone: for some Chinese people, China's newfound wealth is as distant as it was before. Despite the fact that China's economy increased by over 10 percent in the first half of 2006, oppressive poverty still affects millions of Chinese. How many exactly depends on how it is measured. If the official Chinese poverty line, RMB680 a year, is used as the metre stick, there are 23 million people living in poverty in China. It is often noted that China's poverty line is much lower than the internationally accepted "one dollar a day" measure, which when applied to China admits between 120 to 130 million into the poverty club.

Regardless of the scale used, it does nothing to change the fact that there are millions of Chinese people so entrenched, that escape can seem little more than a dream. These people are mostly the rural poor, who have been left behind by the initial economic boom. How to help these people, isolated from the general rise in affluence, is an issue of utmost importance.

One of the most promising methods of reducing poverty, if it can properly get off the ground, is microfinance (or more specifically, microcredit): the giving of small loans to people normally excluded from standard financial services because they don't have any collateral. Microfinance exists in China in the form of a number of NGOs, such as the China Foundation for Poverty Alleviation (CFPA), which is affiliated with the Chinese government, and France-based PlaNet Finance.

What characterises microfinance is not only the small loans, but also the joint-responsibility that it demands from the borrowers. The most common method was pioneered in the 1970s by the Grameen Bank in Bangladesh. Instead of lending to individuals, loans are given to groups who are collectively responsible for the debt being paid. The group members put pressure on each other so that the debt is paid, with the further incentive of successively higher loans upon repayment.

The small loans that microfinance institutions give out, starting at about US$100, might not seem like much, but to the extremely poor they can make the difference between having nothing and having a future. With such a small sum of cash, some livestock can be bought, which is an investment that can be subsequently profited from. Although they deal in small amounts, microfinance can have a big impact on the poor.

Problems in practice

Microfinance might seem attractive on a conceptual level, but getting a practical working model in China has proved problematic. The reason is, in its current state, microfinance is primarily operated by NGOs, which are rather limited in scale. The ultimate goal of these NGOs is to bring about the involvement of commercial banks. The advocates of microfinance know that banks aren't going to help the poor out of the goodness of their hearts, which is why they promote microfinance as a profitable venture, by saying that the number of defaulters is low, and since borrowers have no collateral, a relatively high level of interest can be charged.

The CFPA has adopted the Grameen Bank's model: it lends to groups of between five and seven individuals, who are jointly responsible for the debt's repayment, and they charge interest at between 7-9 percent. Forty percent of its current loans are going to women, who are considered less of a risk than men, because they are less likely to engage in migrant work, drink or gamble. The CFPA claims that just one percent of its loans turn out to be bad.

There are a number of reasons why banks have not been eager to plunge into microfinance, such as low interest rates and few government incentives to get involved. And since China's financial market is not fully open yet, there are limits on how much foreign microfinance institutions can get involved.

Actual practical problems of disbursing the loans also make banks wary. Lending to the isolated rural poor seems a costly procedure. A representative of the bank would have to travel to a remote part of the country to assess whether the loan should be given out, and then arrangements would need to be made concerning repayments. All this seems like a lot of trouble for a loan of as little as US$100-200.

Waiting game

Here lies the dilemma. Banks are uncertain if lending to the poor is profitable enough to become involved in, so the onus lies on the NGOs to prove that it is. The problem is that the NGOs, due to their size, are only able to do so on a limited scale.

Procredit is a German investment company that is the main shareholder in nineteen microfinance banks across the world. It is trying to nurture partnerships with some of China's 130 city commercial banks and encouraging them to experiment with microfinance in urban areas, giving out loans that are higher than the norm of RMB5000-10,000. By lending to the urban poor, the travel costs of going out to the countryside are dismissed, and by giving out larger loans, the yields will be higher, thus making microfinance seem all the more attractive to the banks.

The main problem is that this strategy will give a skewed portrayal of the microfinance enterprise. While it is undeniable that there are plenty of urban poor, for microfinance to properly succeed, it must expand to the countryside; all that urban microfinance will do is show that microfinance can work in the cities. Whether or not it will convince banks to stretch their operations into the countryside is uncertain.

It may well be the case that the only people who are willing to take the commercial plunge into microfinance are those who have done so before. But in China, no one has explored such territory, except for the international microfinance institutions that are, as of now, excluded from setting up their microfinance banks in China. So, until the Chinese financial market has opened up sufficiently, China's rural poor will be excluded from what is one of the best ways of getting private enterprise to help the most impoverished.