Can China’s Financial System Become More Inclusive?


In its Decision on Major Issues Concerning Comprehensively Deepening Reforms of 2013, China stated that the nation must develop inclusive finance to improve financial markets. Inclusive finance attempts to reach all borrowers that seek funds, especially those who cannot readily obtain them, such as the poor, those in rural areas, small and medium enterprises, and micro-enterprises. Can China’s financial system indeed become more inclusive to envelop individuals and firms that have had to rely on non-bank financial alternatives?

To carry out this directive, the People’s Bank of China has added 20 billion RMB in refinancing loans to the rural sector and encouraged internet finance, while the China Banking Regulatory Commission has encouraged rural commercial banks to lend to agriculture, farmers, and rural areas to develop inclusive finance. Financing to small and medium enterprises (SMEs) and micro-enterprises has also been extended via policies and institutions.

Lending to rural areas has been an important focus of the Chinese government since the 1920s, when the first rural credit cooperative was established in Xianghe County, Hebei Province for disaster prevention. Rural finance was periodically threatened by various forces; for example, during the Cultural Revolution, rural credit cooperatives (RCCs) were governed by peasant communes and broke down under poor management, and later the rural credit cooperatives faced a serious buildup of non-performing loans in the nineties, which peaked in 1999. RCCs were reformed in 2003 and expanded greatly after this period, coming to dominate rural financial markets. Additional rural credit institutions exist alongside the popular RCCs, including bank branches, rural mutual credit cooperatives, and informal and semi-formal institutions.

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Rural finance policy echoing the 2013 Decisions document include lowering reserve requirement ratios for rural commercial banks and rural credit cooperative unions, encouraging venture capital and private equity financing in rural areas, providing fiscal subsidies to village banks, and increasing loan limits for tax breaks to banks for lending to rural borrowers. Small loans to rural households incur greater credit risks, and the tax breaks in particular help to offset some of the credit risks faced by rural lenders.

Extending loans to SMEs and micro-enterprises has also been an important policy item. SME financing has been intermittently prioritized by the central government in recent years. Measures to improve SME funding include the establishment of microcredit companies, creation of credit guarantee companies to guarantee SME loans, planning of a national social credit system to provide credit scoring, and targeted lending by the Ministry of Finance. Micro-credit institutions have catered to SMEs, micro-enterprises, and other rural borrowers since 2008. Credit guarantee companies have guaranteed SME loans to increase bank lending to these firms, with some success. A social credit system will be introduced in 2017 to ensure that individuals and institutions can be rated based on available credit data. Ministry of Finance lending has targeted SMEs that fall into specified policy categories. As part of the recent attempt to roll out the inclusive finance policy, banks have been further encouraged to lend to SMEs. In addition, bank loans to SMEs will be securitizable to control risk and increase funding flows to this underserved sector.

Despite these measures, a dearth of funding persists for poor, rural borrowers, as it does for SMEs and micro-enterprises. It is not clear that the recent push to make finance truly inclusive is a break with past policies that have had limited success. For one, banks often try to refrain from lending to underfunded groups since they are higher credit risks. Venture capital and private equity investors may be reluctant to invest in rural areas due to the lack of human capital and to insufficient innovation found in these areas. While some of the policies that have been or are being carried out are certainly beneficial, including the rollout of the social credit system, tax breaks for rural lending, and securitizing SME loans, these may not represent the whole answer to the inclusive finance problem.

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