To be ,or not to be? The current challenge of Chinese Micro-credit companies

A general introduction to China current micro-credit market, and an in-depth analysis of micro-credit market competition.
By: Ming Zhou


News Review:

The Chinese economy has experienced a significant economic growth over the last few decades, and base on the empirical study from Burgess and Panda, there is a strong correlation between economic growth and financial development. The concepts of Micro-Finance was introduced by Mohammad Yunus in mid-1970s, Microfinance is a program which offers credits, savings and other financial services to poor household or individual who cannot afford services from the commercial bank. (Julie Schaffner)

According to Xinhua news, the article “Outstanding loans of Chinese micro-credit firms hit 929 bln yuan in September” states China’s microfinance market has grown exponentially and the total amount of outstanding loans reached up to 137 billion U.S. dollar on Sep, 2016, with 8,741 companies which are related to Microfinance market. Much small-medium businesses or individual households have been benefiting from access to a small loan. The Chinese government encourages the ongoing investment activity to these little businesses, which can be explained by the concept of the Solow model. As more and more entrepreneurs choose to open business, this is more likely to generate more ideas; a good idea could often transform to new technology. Technology is substantial to economy growth; one good illustration of this theory is by comparing South Korea and North Korea. South Korea is more technological advanced than North Korea and hence it has a much stronger economy.

Competition in the micro-finance market, a general landscape:

Although many small business benefits from the blooming micro-credit market, the micro-finance market is still facing some challenges.  Lenders face strong adverse selection due to an unsound information system in China. Micro-finance companies also facing strong competition from commercial banks. Unlike the situation explained by Julie, Commercial Banks have a large market sector in China micro-credit market; many commercial banks have micro-credit sector that offer loan to small and medium enterprises. Aside from commercial banks, Micro-credit companies also face competition from rural finance and online finance such as P2P lending. Rural finance offer loan for agricultural purpose. On other hand, with easier access to the Internet, online finance has raised some world-known corporations such as Alibaba which offers similar finance service to small enterprises, who trade goods through the Alibaba’s platform. Microcredit companies in China targets finance for small enterprise rather than individuals. (Jeffrey Riecke) And this is consistent with the news article, as Jiangsu Province has the most amount of micro-credit companies, the region is well known for business activity base on its geography advance.

One interesting insight I got from a journal on the China Story, author Luke Deer illustrates the boom of China micro-finance offers many access to small enterprise. However, the cost of borrowing is much higher than similar program in developed economy. According to the survey, the rate of borrowing offered by the Rural Cooperative Banks was 13.8% for a annual loan, which is three times higher than China’s official lending rate at that period. The article points out although the cost of borrowing was high, households still prefer to borrow from the rural program, rather than informal borrowing from family and friends, is the program offer service which comes with low transaction cost and shorter period of time, and the process is transparent which reduce asymmetric information. (Luke Deer) This finding is consistent with Julie’s theory, when transfer costs are low and markets are well integrated, entrepreneurs can produce output in a cheaper price as input is cheaper.

The Challenge:

The boom of China credit market not only benefits the small enterprises, but it also provides opportunity for lenders as well. Most of the owners of micro-credit companies do not have proper knowledge on operating properly compared to developed countries. For instance, the owner may only consider lending money out as a “capital game,” which is a method to increase their personal wealth by offering a high-interest loan. The only focus on return does not benefit the business in the long run, as lack of standardized management and ambition to expand the business will eventually terminate many micro-credit companies in the future.

Unlike the commercial banks, micro-credit companies have limited amount of fund for loans. Without proper risk management and sufficient information access, micro-credit lenders face high adverse selection. Likewise, since commercial bank has also started to enter the micro-credit market, micro-credit companies’ faces increased risks as lack of competition, regarding lending rate and ability to lend. Moreover, as Jeffrey mentioned in his article, these companies have low access to credit reporting information from the central bank of China. I think although the government does encourage the activity of micro-finance, local government does not provide sufficient help to these lenders. Likewise, the government does not give a specific guideline or regulation on the micro-finance market. Many lenders can enter the market easily, facing direct competition from the commercial bank, one thing worth mentioning is four out of five commercial banks in China are owned by State. China economy is complicated as it is half capitalism and half socialism. Although the government tries not to intervene in the market, the existence of State-owned enterprise creates a disadvantage to other, as state-owned enterprises have more connection and can easily gain information or help from the government.

In the long run, I think the micro-credit market will well divide into smaller segments as market specialization increase companies’ ability to survive. A significant amount of small micro-credit companies will be eliminated; the remaining will transform to rural finance as they do not have the ability to compete with the commercial bank in the urban area. On the other hand, smaller companies might merge or collaborate with each other to compete with the commercial bank or be acquired by the commercial bank as a retailer in the rural area.

Works Cited

Outstanding loans of Chinese micro-credit firms hit 929 bln yuan in September. (2016, October 25). Retrieved April 24, 2017, from

Schaffner, J. (n.d.). Development Economics: THEORY, EMPIRICAL RESEARCH, AND POLICY ANALYSIS (Chapter. 21). Tufts University.

Deer, L. (2014, September 17). A Springtime for Microfinance in China? Retrieved April 24, 2017, from

Riecke, J. (2015, March 12). China’s Microfinance Landscape: Nonprofits, Microcredit Companies, Rural Financers, and Alibaba. Retrieved April 24, 2017, from

2 thoughts on “To be ,or not to be? The current challenge of Chinese Micro-credit companies”

  1. Overall I found this to be an interesting look into the state of micro-credit in China. A lot of times when I think of micro-credit I focus on the non-profit side. The point about Chinese microfinance companies focusing on returns and charging very high interest rates, like you said, demonstrates their lack of knowledge regarding the field. It’s a very interesting challenge that is made worse by the for-profit nature of the companies. Also, you said that you think the local government should help these companies more, but what would you want them to do? I am curious what the power of just the local government could do here, given that the issue seems be about a lack of knowledge on the lenders’ part, as well as their lack of funds, which does not seem like something the local government could alleviate by itself.


  2. This was an extremely interesting look at the micro credit market in China. Your analysis was very interesting and i could see that being a definite possibility of happening. The merge that would occur could be similar to that of how smaller farms merge in order to gain the ability to act as a larger farm.


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