According to incomplete statistics, there were more than 4,000 micro-loan companies nationwide at the end of 2011. With the explosive growth of micro-loan companies, the PRC’s micro-loan market has attracted an increasing number of foreign investors. Foreign companies such as Temasek, International Finance Corporation and Microcred Group have invested in and established micro-loan companies in the PRC. So, what are the particular features of the micro-loan industry? And what is the current state of play with foreign-invested micro-loan companies?
If a PRC local government permits the entry of foreign investment into the micro-loan market, a foreign investor needs to familiarise itself with the particular features of the PRC’s micro-loan industry to avoid unnecessary legal risks. Micro-loan companies in the PRC are subject to oversight of the finance offices at every level. The particular features of the micro-loan company industry are mainly manifest in such facets as establishment, sources of funds, application of funds and oversight.
Establishment of companies: the preparations for establishment, formal opening for business, site selection, qualifications of the shareholders, registered capital and management personnel for a micro-loan company are required to satisfy the policy requirements formulated by the competent local finance office or authority.
Source of funds: the main sources of funds of a micro-loan company are its capital, bank financing to a certain limit and other fund sources approved by the local finance office. Although the requirements vary across regions, “lend only, no deposits” is an important principle that all micro-loan companies are required to abide by in their fund sourcing and operations.
Application of funds: in order to achieve their objective of encouraging the growth of micro-loan companies, governments throughout the PRC have been active in formulating specific provisions addressing issues such as the loan balance, “three agricultures” loan ratio, and ratio of micro-loan borrowers. The interest rate on loans by micro-loan companies is required to fall between 0.9 to 4 times the benchmark rate for loans published by the People’s Bank of China.
Oversight: the local finance office or other authority designated by the provincial level government is responsible for overseeing the micro-loan companies in its jurisdiction. A micro-loan company is required to make sufficient allocations to a loan loss reserve in accordance with regulations of the local finance or other relevant authority. The People’s Bank of China monitors interest rates and fund flows of micro-loan companies.
Neither the 2007 nor the most recent 2011 version of the Catalogue for Guiding Foreign Investment in Industry places industry or percentage restrictions on foreign investment in the micro-loan sector. However, the Guiding Opinions on Pilot Micro-Loan Companies (Yin Jian Fa  No. 23) and the pilot project policies formulated by local governments with reference to the guiding opinions specify the shareholding percentage of any single investor. Accordingly, in practice, the shareholding percentages in a foreign-invested micro-loan company are subject to such restrictions.
Restrictions aside, foreign-invested micro-loan companies receive vastly different treatment in different areas. In some areas they enjoy treatment surpassing national treatment, for example being permitted to wholly own such a company, whereas in other areas they are forbidden entry to the local market. Fullerton Micro-Loan (Sichuan) established by Fullerton Financial Holdings, a subsidiary of Temasek, is a wholly foreign-owned micro-loan company. Subsequently, Fullerton Financial Holdings also established the wholly foreign-owned Fullerton Micro-Loan (Hubei) in Hubei.
Although the Sichuan and Hubei governments place limits on the shareholding percentage of any one investor, foreign-invested micro-loan companies in both provinces can establish 100% foreign-owned entities. In contrast, governments in certain provinces and municipalities on the east coast have locked the gates, at least for the time being, against foreign investors.
The author is of the opinion that there are two main reasons for this discrepancy in policies. The first is the difference in the degree of activity and sufficiency of private capital in the various regions. The PRC’s main objective in developing micro-loan companies is to invigorate the county-level and rural finance markets, and strengthen support of the “three agricultures” and small and medium enterprises, since the loan threshold of traditional financial institutions is high and their funds are limited.
In certain provinces and municipalities along the east coast, private capital is active and funds plentiful. With a view to utilising the power of local private capital to the greatest extent possible, and to effectively control a grey area in private lending and borrowing, the local governments are provisionally taking a wait and see attitude toward, or even prohibiting outright, foreign investment. In contrast, in certain provinces and municipalities in central and western China, the degree of activity and sufficiency of private capital badly trails that of the east coast. Offering treatment exceeding that of nationals to foreign investors establishing micro-loan companies is a win-win option, for these cities and for foreign investors.
The second reason is the discrepancy in professional expertise between PRC investors and foreign investors. The majority of foreign investors investing in the micro-loan industry are large institutions with extensive experience in the finance business (credit business) outside the PRC. Although the average PRC domestic investor satisfies the local qualification requirements in respect of its registered capital, profitability, etc., it lacks experience in the finance industry (credit business).
Bai Chengyu, secretary general of the China Association of Microfinance, has said that the requirements of local governments in respect of the shareholding percentage of any one investor are mostly aimed at shareholders that have no finance industry background, to ensure the good operation of the companies. In contrast, the majority of foreign companies that have entered the PRC market already have extensive experience in micro-lending outside the PRC, and relaxing the shareholding percentage is conducive to developing their operations.
For these reasons, before investing in the PRC market, a foreign investor needs to duly liaise with the local government to better understand local laws and regulations and grasp the government authorities’ most recent policy attitudes toward the entry of foreign investment. After all, the authority for approving micro-loan companies lies in the hands of the local government.
Kenneth Kong is a partner and Cindy Guo is an associate at Martin Hu & Partners (MHP Law Firm)
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胡光 Martin Hu
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孔焕志 Kenneth Kong
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郭闻 Cindy Guo
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