Int'l investors eye credit guarantee market
(China Daily)
Updated: 2005-04-25 09:14

The huge demand for China's credit guarantee market is providing a desirable entry point for international strategic investors, market observers said.

Early this month, the Asian Development Bank offered an investment of up to US$10 million to one of China's leading private credit guarantee companies, Credit Orienwise Group Ltd (Credit Orienwise), which specializes in guaranteeing loans for small and-medium-sized enterprises (SMEs).

This is the first foreign capital injection into the country's credit guarantee sector and experts say the decision may attract more overseas investors.

The market demand comes mainly from the rapid growth of China's SMEs.

Last year, about 857 million yuan (US$104 million) worth of bank loan applications nationwide needed credit guarantees and 756 million yuan (US$91 million) of those were from SMEs.

However, the country's credit guarantee companies (CGCs) can only provide guarantees for loans of 16.70 million yuan (US$2 million), according to the statistics of the State Information Centre.

Meanwhile SMEs are developing dramatically.

SMEs play a significant role in China's economy and are key drivers of employment, economic growth and development. They account for almost half of gross domestic product (GDP), 60 per cent of exports, and 40 per cent of fiscal revenues. SMEs also provide 75 per cent of urban and rural employment.

SMEs rely heavily on access to external capital to finance their operations. However, more than 80 per cent of China's SMEs have difficulty accessing financial services and securing financing, according to the State Information Centre.

"Lack of access to bank lending is considered the main financing difficulty and stumbling block for sustainable growth for SMEs," said Zhang Kaiyong, chairman of the board of Credit Orientwise.

"Most of the banks lack experience of risk assessment and prefer to grant loans to credible large enterprises to reduce nonperforming loans," Zhang said.

This is especially true for the four big State-owned banks that dominate bank finance in the country. Their traditional customers are large State-owned and shareholding companies while the other banking institutions have limited coverage and financial products, according to Zhang.

Moreover, the high frequency and short-term nature of SME loans, unfamiliar markets and often complicated ownership structures, as well as the lack of sufficient and reliable operational and financial data for loan appraisal, have resulted in higher business development and administration costs for banks, according to Di Na, an official of National Development and Reform Commission (NDRC).

Because of the long process of recognition, registration, and evaluation for the SME borrower's collateral, banks have difficulties in meeting the SMEs frequent and seasonal demand for debt, she added.

SMEs need effective outside guarantees to get bank loans.

Based on a survey conducted by the People's Bank of China (PBOC), an estimated 60 per cent of all bank loans in China are supported by a guarantee of some kind.

However SMEs always lack sufficient guarantees to support their borrowing. Real estate and equipment are the major forms of collateral taken by the banks but their discount rates are 50-70 per cent.

The mismatch of demand and supply provides us with a very optimistic perspective about China's credit guarantee market outlook, said William Willms, an ADB Principal Investment Officer.

As these hampering elements still remain in China, CGCs can address a particular weakness and are very much justified as a sustainable business model until the China banking sector has made significant progress, he said.

At least in the medium term, the role of CGCs remains critical in enabling credit to SMEs and therefore constitutes a sustainable business model. Before China's banks are able to assume full credit decisions with regard to SME lending, and while interest rate ceilings remain in place, CGCs can provide a crucial credit assessment service and risk mitigation mechanism, he added.

CGCs can work as an agency between borrowers and banks to ease the constraints of the guarantee requirement for SME borrowing. But China's CGCs are far from being sophisticated. The huge market potential presents challenges to the CGCs too.

"Although foreign strategic partners can bring international expertise and help the sector grow healthier, the market has many other rooms for improvement," said Wei Yong, the Beijing office manager of Credit Orientwise.

First of all, the sector is too segmented and needs consolidation, he said. A survey by NDRC last year shows most of China's CGCs are very small. Of the 225 CGCs surveyed, the average asset is about 33 million yuan (US$3.98 million) and the average number of employees is about seven.

Statistics show that as of February 2004, there were approximately 1,000 specialized CGCs registered in China. About one-third are fully government-funded and one-third have some government background, while the rest are privately owned.

But the government-based CGCs often focus their business on a certain industry as a support to the government policy of enhancing the development of the industry. As a result, these CGCs established for policy reasons are inactive, according to Zhang Kaiyong.

Even taking into account the government-funded ones, China's CGCs currently serve only 48,000 SMEs (or 0.6 per cent) of the approximately 8 million SMEs nationwide. A ranking of all registered CGCs in Shenzhen by registered capital as of the end of 2003, shows that less than half of all CGCs were actively engaged in the business.

On another hand, the lack of strict market regulation presents another loophole, Wei Yong said.

While not formally regulated, the sector is under the control of NDRC, which has issued some relevant guidelines.

In addition, the Ministry of Finance has issued some administrative measures on this regard.

"But there is no law covering the credit guarantee sector, which hampers the formation of a healthy credit guarantee culture," Wei said.

The lack of an effective information platform is another problem. It is hard for the CGCs to get correct information about the borrowers, which make the deals even more risky, he said.

Moreover, experts say there is a need to develop a credit re-guarantee system.

In China, the CGCs are required to take 100 per cent responsibilities for the guaranteed loans while the international practice is 70 per cent and the other 30 per cent is shared by the lenders.

A re-guarantee system can help reduce the risks of the CGCs, said Zhao Xijun, a professor at the Financial and Securities Institute of Renmin University of China.