Financial Inclusion in China: Policy, Experience, and Outlook 9819956625, 9789819956623

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Financial Inclusion in China

Hongmei Zhu · Wenting Zhang

Financial Inclusion in China Policy, Experience, and Outlook

Hongmei Zhu Beijing Academy of Social Sciences Beijing, China

Wenting Zhang Research Institute of the People’s Bank of China Beijing, China

ISBN 978-981-99-5662-3 ISBN 978-981-99-5663-0 (eBook) https://doi.org/10.1007/978-981-99-5663-0 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore Paper in this product is recyclable.

Preface

Many people worldwide have been excluded from formal financial services due to various factors. Even in developed economies with sound financial systems, relatively disadvantaged groups are often denied access to effective financial services. According to the World Bank’s 2021 Global Findex database survey, 1.4 billion people are not being reached by traditional financial services, and financial exclusion is widespread for those with low incomes and education levels. In 2005, the United Nations proposed the concept of “inclusive finance.” Inclusive finance aims to extend affordable financial services to less developed regions and low-income groups by improving financial infrastructures and providing affordable, convenient financial services. In 2015, the United Nations adopted the 2030 Agenda for Sustainable Development, which focused on inclusive finance as an important way to achieve sustainable development. Developing inclusive finance has become a global consensus among governments and policymakers. Since reform and opening up, China has attached importance to improving financial services for disadvantaged groups such as rural residents, and micro, small, and medium enterprises (MSMEs). In 2015, China formulated the “Promoting Inclusive Financial Development Plan (2016–2020) (Chinese Edition).” In 2016, during its presidency of the Global Partnership for Financial Inclusion (GPFI), China proposed the issue of “Digital Financial Inclusion” and issued the G20 High-Level Principles for Digital Financial Inclusion at the G20 Hangzhou Summit in the same year. China is committed to learning from international experience while infusing Chinese features, combining government guidance with market dominance, improving basic financial services, and improving financial services in key areas. Through policy guidance and active practice by the financial sector, China has gradually formed a unique development model of inclusive finance and achieved remarkable success. The coverage, availability, and provision of financial services in China have been continuously improved, effectively helping to alleviate poverty, responding to the COVID-19 pandemic, and serving people’s livelihoods. In China in 2021, there are 89 percent of adults had bank accounts, which was 13 and 18 percentage points higher than the average for the world and developing economies, respectively. China is leading the world in the development of digital financial inclusion. In 2017, five v

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Preface

cases1 from China were selected to be included in the G20 report on Digital Financial Inclusion: Emerging Policies and Approaches. A number of countries have prioritized and promoted inclusive finance, which has yielded fruitful results. All the success stories about inclusive finance are mirrors of the specific historical, cultural, political, and financial context of the specific country in which they took place. The features of China’s inclusive finance model are as follows. First, adopt a “multi-pronged” approach (including building a retail payment system and service network to help farmers withdraw money, finding new rural financial service providers, and encouraging commercial banks to provide services) to achieve a high level of financial service availability. Second, the government should establish a strong and comprehensive financial infrastructure network and provide strong policy support for financial inclusion in fiscal, monetary, regulatory, and other aspects. Third, give full play to the role of digital technology. Fourth, strengthen consumer protection and keep pace with financial deepening and innovation. However, the development of inclusive finance in China faces challenges. Some stakeholders overemphasize the social nature of financial inclusion and neglect market principles and sustainability. For many financial service providers in China, there are still many barriers to achieving commercial sustainability of financial inclusion. The rapid growth of digital finance has also created regulatory challenges. The legal and regulatory framework for financial consumer protection needs to be further improved. In the future, China’s inclusive finance will aim to serve national development strategies such as rural revitalization and common prosperity. Inclusive finance will focus not only on the quantity of services but on the quality as well. On the supply side, the focus will not only be on coverage but also on sustainability. On the demand side, the focus will be on availability and the financial health and resilience of financial consumers. The two authors of this book have been involved in research on financial inclusion for many years and are familiar with relevant policies and practices. This book seeks to provide first-hand information for readers concerned about inclusive finance and sustainable development by summarizing China’s policy measures and practical innovations in the development of inclusive finance and provides details on China’s experience to guide the development of inclusive finance in other regions. The structure of this book is as follows. Chapter 1 provides an introduction, and Chap. 2 recalls the development of inclusive finance in China. Chapter 3 introduces China’s policy financial inclusion framework, including its fiscal policies, monetary policies, and regulatory policies. Chapter 4 introduces the organizational system of inclusive finance in China, that is, the providers of inclusive financial services. Chapter 5 introduces the infrastructure of inclusive finance, such as payment services, credit information systems, and consumer education and protection. Chapter 6 intro1

The “five cases” include: First, the introduction of Internet finance guidance; Second, the classification and regulation of payment accounts; Third, the establishment of a self-regulatory association for the Internet finance industry; Fourth, the improvement of payment infrastructure; Fifth, the establishment of a sound credit collection system.

Preface

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duces the practices and innovations of inclusive finance in the fields of credit, direct financing, insurance, and digital financial inclusion. Chapter 7 outlines the achievements of China’s inclusive finance development. Chapter 8 summarizes the features of China’s inclusive finance development model and looks to future development directions and key areas of concern. Beijing, China

Hongmei Zhu Wenting Zhang

Acknowledgements

We have both been fortunate to work at the People’s Bank of China (PBOC), where we have the opportunity to work with and learn from this great group of outstanding economists in the Research Institute of the People’s Bank of China (PBOCRI). We wish to express our appreciation to our colleagues. Special thanks go to the General Director of the PBOCRI, Dr. Chengjun Zhou, for his complete support with all aspects of this book publication. We also sincerely honour Yao Lei for his insightful comments and instruction during our research and work. We are deeply indebted for our family support. Hongmei thanks Professor Yong Wang, as his love, sacrifices, and encouragement are the true force that drives her to pursue her dreams. Wenting offers her sincere thanks to Mingjian Huang; without his outstanding guidance and support, many of her books would not have been possible and she would not have accomplished so much in her research career. Thank you for so many things, to our family. We love you all! The publication of this book has been strongly supported by Springer Nature, especially Emily Zhang, Kavitha Palanisamy, and many others. Thank you for your hard work!

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Contents

1 Overview of Inclusive Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 The Background for Proposing Inclusive Finance . . . . . . . . . . . . . . . 1.1.1 Financial Exclusion and Financial Inclusion . . . . . . . . . . . . . 1.1.2 Concepts and Connotations of Inclusive Finance . . . . . . . . . . 1.1.3 Key Elements of Inclusive Finance . . . . . . . . . . . . . . . . . . . . . 1.2 Inclusive Finance and Inclusive Development . . . . . . . . . . . . . . . . . . . 1.3 International History of Financial Inclusion Practices . . . . . . . . . . . . 1.4 Main Models of Inclusive Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Agent Banking Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.2 Micro-finance Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.3 Mobile Payment Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.4 Simple Account Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.5 Science and Technology Application Model . . . . . . . . . . . . . 1.5 Financial Inclusion in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5.1 The Official Proposals for Inclusive Finance in China . . . . . 1.5.2 Overview of Financial Inclusion in China . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 1 2 3 5 6 7 7 8 10 11 11 12 12 13 14

2 Development of Inclusive Finance in China . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Micro-finance Focus Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Comprehensive Improvement of Rural Financial Services Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Reforming Financial Institutions Related to Agriculture and Rural Areas and Enhancing the Capability of Rural Financial Services . . . . . . . . . . . . . . . 2.2.2 Enriching the Rural Financial Service System and Improving Inclusive Finance Supply . . . . . . . . . . . . . . . . 2.2.3 Comprehensively Promoting Innovation in Rural Financial Products and Services . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 Improving the Agricultural Insurance System . . . . . . . . . . . .

17 17 18

18 19 19 20

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2.2.5 Vigorously Promoting the Construction of the Financial Infrastructure in Rural Areas . . . . . . . . . . . . 2.2.6 Initially Establishing a System of Policy Support for Rural Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.7 Constantly Improving the Rural Financial Supervision System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Poverty Alleviation Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Set up Targeted Micro-finance Products for Poverty Alleviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Innovate Policy Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Development-Oriented and Policy-Oriented Banks Set up Financial Poverty Alleviation Departments . . . . . . . . 2.3.4 Improve Insurance Protection . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.5 Increase Support for the Capital Market . . . . . . . . . . . . . . . . . 2.4 Stage of Strengthening Financial Services for Small and Micro Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 Further Improve the Inclusive Finance Service System . . . . 2.4.2 Innovate Loan Products and Services . . . . . . . . . . . . . . . . . . . 2.4.3 Improve the Policy Support System . . . . . . . . . . . . . . . . . . . . . 2.4.4 Establish Risk-Sharing and Credit Enhancement Mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.5 Strengthen the Use of Financial Technology . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 21 21 22 22 22 23 23 24 24 25 25 26 26 27 27

3 China’s Financial Inclusion Policy Framework . . . . . . . . . . . . . . . . . . . . 3.1 Strategic Planning for Financial Inclusion . . . . . . . . . . . . . . . . . . . . . . 3.2 Money and Credit Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Credit Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Fiscal and Taxation Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Government Subsidies and Incentive Policies . . . . . . . . . . . . 3.3.2 Tax Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Regulatory Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Exempt Regulatory Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Implement Differentiated Regulation . . . . . . . . . . . . . . . . . . . . 3.4.3 Strengthen Assessment and Supervision . . . . . . . . . . . . . . . . . 3.5 Pilot Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29 29 31 31 38 39 39 44 46 46 47 47 47 50

4 Organizational System of Financial Inclusion in China . . . . . . . . . . . . . 4.1 Overview of Multi-level Organization System . . . . . . . . . . . . . . . . . . 4.1.1 Banking Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 Insurance Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.3 Capital Market Service Institutions . . . . . . . . . . . . . . . . . . . . . 4.1.4 Other Financial Organizations . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.5 Informal Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

51 51 52 52 52 52 52

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4.1.6 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Banking Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 Small and Medium-Sized Institutions . . . . . . . . . . . . . . . . . . . 4.2.2 Large-Scale Banking Institutions . . . . . . . . . . . . . . . . . . . . . . . 4.3 Insurance Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Capital Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Securities Exchange Market . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 Bond Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.3 Futures Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.4 Capital Market Service Institutions . . . . . . . . . . . . . . . . . . . . . 4.5 Other Financial Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Micro-credit Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.2 Financing Guarantee System . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.3 Financing Mutual-Aid Organizations . . . . . . . . . . . . . . . . . . . 4.6 Informal Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53 53 53 57 63 64 64 69 70 70 71 71 74 80 81 82

5 Infrastructure of Inclusive Finance in China . . . . . . . . . . . . . . . . . . . . . . 5.1 Payment System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Payment Service Organization System . . . . . . . . . . . . . . . . . . 5.1.2 Use of Payment Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 Main Practices of Enhancing the Inclusiveness of Payment Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Credit Reference System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 The Credit Reference Market . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Building of the Credit Information System for Small, Medium- and Micro-sized Enterprises . . . . . . . . . . . . . . . . . . . 5.2.3 Building of the Rural Credit Information System . . . . . . . . . 5.2.4 Chattel Financing Registration and Publicity System . . . . . . 5.2.5 Service Platform for Accounts Receivable Financing . . . . . . 5.3 Education and Protection of Financial Consumers . . . . . . . . . . . . . . . 5.3.1 Protection of Financial Consumers . . . . . . . . . . . . . . . . . . . . . 5.3.2 Financial Consumer Education . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Statistical and Monitoring System of Financial Inclusion . . . . . . . . . 5.4.1 Statistics of Agriculture-Related Loans . . . . . . . . . . . . . . . . . . 5.4.2 Statistics of Small and Micro Loans . . . . . . . . . . . . . . . . . . . . 5.4.3 Financial Inclusion Indicator System . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

83 83 83 85

6 Innovative Practices of Inclusive Finance in China . . . . . . . . . . . . . . . . . 6.1 Expand the Coverage of Basic Financial Services with Multiple Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Innovation of Inclusive Financial Products . . . . . . . . . . . . . . . . . . . . . 6.2.1 Credit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 Direct Financing Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 Insurance Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

86 89 89 93 94 96 96 97 97 100 103 103 104 104 104 105 105 108 108 114 118

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6.2.4 Collaborative Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Digital Inclusive Financial Development . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Online Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Digital Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.3 Digital Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.4 Online Investment and Wealth Management . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124 126 127 128 131 132 133

7 Achievements in the Development of Inclusive Finance in China . . . . 7.1 Achievements in the Development of Inclusive Finance in China—Domestic Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Availability of Financial Services . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Use of Financial Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.3 Consumer Financial Qualification . . . . . . . . . . . . . . . . . . . . . . 7.2 Achievements in the Development of Inclusive Finance in China—International Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 International Comparison Based on Global Findex Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 International Comparison of Smalland Medium-Sized Enterprises Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.3 International Comparison of Consumers’ Financial Qualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Achievements in the Development of Inclusive Finance in China—Perspective of Academic Research . . . . . . . . . . . . . . . . . . 7.3.1 Financial Threshold Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Economic Growth Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Trickle-Down Effect and Spatial Spillover Effect . . . . . . . . . 7.4 China Actively Participates in International Cooperation of Inclusive Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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8 Perspectives on the Development of Inclusive Finance in China . . . . . 8.1 Experience of Inclusive Finance in China . . . . . . . . . . . . . . . . . . . . . . 8.1.1 Get Through the Last Kilometre of Financial Services . . . . . 8.1.2 Investment in Financial Infrastructure . . . . . . . . . . . . . . . . . . . 8.1.3 Use of Online Networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.4 Encourage Market Participation and Innovation . . . . . . . . . . 8.1.5 Promote Policy Pilot Innovation . . . . . . . . . . . . . . . . . . . . . . . . 8.1.6 Protect the Rights and Interests of Financial Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Challenges Faced by Inclusive Finance in China . . . . . . . . . . . . . . . . 8.2.1 Establish a Correct Concept of Inclusive Finance . . . . . . . . . 8.2.2 Promote the Commercial Sustainability of Inclusive Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

157 157 157 158 158 158 159

135 136 136 144 145 145

146 151 152 152 153 154 154 155

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8.2.3 Comprehensively Understand Digital Finance and Manage Its Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.4 Strengthen Financial Consumer Protection and Improve Consumer Financial Ability . . . . . . . . . . . . . . . . 8.3 Future Development Direction of Inclusive Finance in China . . . . . 8.3.1 Promoting Rural Revitalization and Common Prosperity with Inclusive Financial Development . . . . . . . . . 8.3.2 Integrated Development of Inclusive Finance, Green Finance, Science and Innovation Finance . . . . . . . . . . . . . . . . 8.3.3 Promote the Healthy Development of Digital Inclusive Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 Build a Long-Term Mechanism for Inclusive Finance Commercial Sustainability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.5 Preventing Financial Risks to Achieve Safe Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.6 Promote Financial Health and Enhance Financial Resilience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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161 162 163 164 164 165 166 166 167 168

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

List of Figures

Fig. 1.1 Fig. 3.1

Fig. 4.1 Fig. 4.2 Fig. 4.3

Fig. 4.4 Fig. 4.5 Fig. 5.1 Fig. 5.2 Fig. 5.3

Fig. 5.4

Fig. 6.1

Overview of development and regulation of financial inclusion in China. Note * In progress; not yet enacted . . . . . . . . Central government subsidies for agricultural insurance premiums. Source Ministry of Finance (Unit: RMB 100 million) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Organizational system of inclusive financial inclusion in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development status of rural banks in China. Data source China Rural Finance Service Report, unit: number . . . . . . . . . . . Development of county-level financial business of the Agricultural Bank of China. Data source China Rural Finance Service Report over the years; unit: RMB 100 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multi-level capital market in China . . . . . . . . . . . . . . . . . . . . . . . . Number of loans and balances of micro-credit companies in China. Data source The People’s Bank of China . . . . . . . . . . . Payment and market infrastructure operators . . . . . . . . . . . . . . . . Proportion of adults using e-payment. Data source Analysis Report on China’s Financial Inclusion Indicators . . . . . Inquiry volume of the credit reference systems. Data source China Credit Reference Industry Development Report (2003–2013), and China Credit Reference Report 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual financing facilitated by the accounts receivable financing service platform (2016–2020). Data source China Credit Reference Report 2020 prepared by the Credit Information System Bureau of the People’s Bank of China, China Financial Publishing House . . . . . . . . . . . . . . . . . . . . . . . . . Number of townships without financial institutions across the country (PCS). Data sources China Rural Finance Service Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14

41 53 55

59 69 71 84 86

91

97

106 xvii

xviii

Fig. 6.2

Fig. 6.3

Fig. 6.4 Fig. 6.5

Fig. 7.1

Fig. 7.2

Fig. 7.3

Fig. 7.4

Fig. 7.5 Fig. 7.6 Fig. 7.7 Fig. 7.8

Fig. 7.9 Fig. 7.10

List of Figures

Income from agriculture insurance premiums (RMB billion). Data Source China Rural Finance Service Report in previous years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Scale and usage rate of online payment users in China. Data source China Internet Network Information Center (CNNIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Various scenarios of bar code payment by users . . . . . . . . . . . . . . Number and usage rate of internet wealth management users. Data source China Internet Network Information Center (CNNIC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of townships without bank branches (pcs). Note By the end of 2020, there were 38,741 townships in China. Data source China Rural Finance Service Report in previous years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Development of mobile payment in China. Data source China Payment Industry Report 2021 prepared by Payment and Clearing Association of China, China Financial Publishing House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to rural and farm households. Note The rural loans cover loans to farmers and loans to rural enterprises and various organizations. Farmers’ loans are all loans issued by financial institutions to farmers, including farm production and business loans and farm consumer loans. Data source China Rural Finance Service Report 2020 . . . . . . . . Balance and growth rate of inclusive small and micro loans from 2019 to 2021. Note Inclusive small and micro-sized enterprises loans are defined as loans to small and micro-sized enterprises, individual businesses and small and micro-enterprise owners with a single credit limit of less than RMB 10 million. Data source The official website of the People’s Bank of China . . . . . . . . . . . . . . . . . . . . . Number of loan households and interest rate of loans for inclusive small and micro-sized enterprises . . . . . . . . . . . . . . Proportion of unsecured loans (%) . . . . . . . . . . . . . . . . . . . . . . . . . Balance of guarantee loans for entrepreneurship and state loans for students . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Personal consumption loan balance per capita in China. Note Personal consumption loans include housing mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adult account ownership rate. Data source Global Findex . . . . . Share of small and medium-sized enterprises’ loan balance to the total loan balance of enterprises in 2018 (%). Data source Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

119

128 128

133

136

138

139

140 141 141 142

143 146

149

List of Figures

Fig. 7.11

Fig. 7.12

Interest rates for small and medium-sized enterprises loans in selected countries in 2020 (%). Data source Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard . . . . . . . . International comparison of consumers’ financial qualifications. Data source Financial Consumer Protection Bureau of People’s Bank of China: Investigation and Analysis Report on financial qualification of Consumers 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xix

150

152

List of Tables

Table 3.1 Table 4.1

Table 4.2

Table 5.1 Table 5.2 Table 5.3 Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5 Table 7.6 Table 7.7 Table 7.8 Table 7.9

Central bank lending and central bank discounts situation . . . . . Profile of practitioners, corporate entities, and business outlets of rural small and medium-sized banking institutions in 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances of agricultural loans issued by large-scale agricultural financial institutions from 2012 to 2020. Unit: RMB 100 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking e-payment business in 2021 . . . . . . . . . . . . . . . . . . . . . . Entities with credit information included in the credit reference system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information of the financial consumer protection units . . . . . . . . Availability of bank branches and machines . . . . . . . . . . . . . . . . . Availability of agricultural withdrawal points . . . . . . . . . . . . . . . Use of accounts and bank cards . . . . . . . . . . . . . . . . . . . . . . . . . . . Proportion of adults who purchased wealth management products (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Global Findex survey indicators in China (2011–2021) . . . . . . . Parity in financial services in China . . . . . . . . . . . . . . . . . . . . . . . Comparison of parity of financial services in selected economies in 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rejection rate of small and medium-sized enterprises in selected countries (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guarantee requirements for small and medium-sized enterprises loans in selected countries (%) . . . . . . . . . . . . . . . . . .

35

54

62 85 91 98 137 137 137 144 145 147 148 149 151

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List of Boxes

Box 1.1 Box 3.1 Box 4.1 Box 4.2 Box 4.3 Box 5.1 Box 5.2 Box 5.3 Box 5.4 Box 5.5 Box 5.6 Box 6.1 Box 6.2 Box 6.3 Box 6.4 Box 6.5 Box 6.6

Business Model of Grameen Bank (GB) . . . . . . . . . . . . . . . . . . . . . The Taizhou Model of Financial Services for Small and Micro Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BOC Fullerton Community Bank . . . . . . . . . . . . . . . . . . . . . . . . . . Establishment of the STAR Market to Facilitate Financing of Innovative Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign-Invested Micro-credit Companies in China . . . . . . . . . . . . Rural Revitalization Theme Card . . . . . . . . . . . . . . . . . . . . . . . . . . Migrant Workers with Bankcards . . . . . . . . . . . . . . . . . . . . . . . . . . Local Credit Reference Platform—Yue Xin Rong . . . . . . . . . . . . . Lishui Case of Rural Credit Information System Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Knowledge Popularization Education and Training in Rural Areas—Jinhui Project . . . . . . . . . . . . . . . . . . . . . Practices of Financial Inclusion Education in Yijun County . . . . . The Service of Helping Farmers Withdraw Money with Bankcards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The “721” Credit Rating System for Poverty Alleviation Microfinance in Mayang County, Hunan Province . . . . . . . . . . . . . Forest Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ningbo Micro Loan Guarantee Insurance . . . . . . . . . . . . . . . . . . . . The First Apple “Insurance + Futures” Project . . . . . . . . . . . . . . . “310” Loan Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 48 56 65 73 87 88 93 95 102 102 107 110 119 121 124 130

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Chapter 1

Overview of Inclusive Finance

1.1 The Background for Proposing Inclusive Finance 1.1.1 Financial Exclusion and Financial Inclusion1 Financial exclusion and financial inclusion represent two sides of finance. Financial exclusion discloses the causes that lead to the problems to be alleviated by financial inclusion, and financial inclusion addresses how to eliminate the phenomenon of financial exclusion. Financial exclusion, which initially referred to parts of the population being excluded from banking services due to the closure of bank branches, was first used by Leyshon and Thrift (1993, 1995). After that, researchers turned their attention to the lack of access to modern financial services for certain specific social groups. Conroy (2005) posits that financial exclusion mainly affects poor and vulnerable groups; their difficulty in accessing financial services from formal channels is what is now meant by financial exclusion. Kempson and Whyley (1999) view financial exclusion as a dynamic process that cannot be explained by any single cause. Mitton (2008) summarizes several types of financial exclusion: geographical exclusion (based on financial institutions’ closing branches), conditional exclusion (based on an individual’s failure to meet identity verification requirements, due to minimum deposit requirements or poor credit history, etc.), price exclusion or market exclusion (because financial service providers do not seek low-margin clients), and self-exclusion (based on cultural or psychological barriers of the individual). Allen et al. (2013) propose two causes for the existence of financial exclusion. The first is that people are reluctant to acquire financial services based on certain personal characteristics, such as their religion. The second is that people are inclined to access financial services but fail to do so given distance, cost, or information asymmetry. Low-income people,

1

Data source: Zhang and Zhang (2015).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_1

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women, and minorities are particularly vulnerable to financial exclusion. Paramasivan and Ganeshkumar (2013) argue that inclusive finance is hindered by many social and cultural economic factors. For example, in terms of demand, there is a lack of awareness and knowledge on the part of the population; in terms of supply, channels are lacking (for instance, there is low bank penetration in an area) and banks are hesitant to engage in costly inclusive finance activities. Additionally, the wide wealth gap and areas with high historical bad debt rates lead to financial exclusion. Mitton (2008) summarizes the harmful consequences of financial exclusion. First, people may resort to obtaining usurious loans as they cannot obtain affordable loans, which in turn creates a chain reaction such as excessive interest burden and violent collection. Second, the lack of insurance and savings makes families vulnerable to financial crises as they do not have contingency plans. Their lack of savings may lead to poverty in old age. Third, the lack of bank accounts limits payment options. In some instances, utility providers may charge higher prices for methods of payment other than bank accounts. Fourth, social exclusion may follow from financial exclusion. Vulnerable groups cannot take advantage of financial tools to expand their production and increase their incomes, which widens the gap between the rich and the poor.

1.1.2 Concepts and Connotations of Inclusive Finance The original intention of inclusive finance was to address financial exclusion. Worldwide, a massive portion of the population is excluded from formal financial services for various reasons. In less developed countries with poor financial infrastructures, large segments of the population do not have bank accounts or barely have access to further financial services even if they do have bank accounts. Even in developed economies with well-established financial systems, the relatively vulnerable populations may not have the effective access to financial services that they need. Inclusive finance has arisen in response to these problems. Different stakeholders give different interpretations of what inclusive finance should include. According to the Asian Development Bank (2000), inclusive finance includes a variety of financial services covering deposits, loans, payments, remittances, and insurance designed for the poor, low-income households, and microenterprises. In 2005, the United Nations introduced the concept of an “inclusive financial sector” in the context of its promotion of the International Year of Microcredit. The concept emphasizes the continuous improvement of accessibility to financial services by improving the financial infrastructure, extending financial services to less developed areas and low-income people, and providing reasonably priced, convenient, and efficient financial services. In 2011, the Global Partnership for Financial Inclusion (GPFI) describes financial inclusion as “a state in which all working age adults, including those currently excluded by the financial system, have effective access to the following financial services provided by formal institutions: credit, savings (defined broadly to include

1.1 The Background for Proposing Inclusive Finance

3

current accounts), payments, and insurance.” And “Effective access” is further defined as “convenient and responsible service delivery, at a cost affordable to the customer and sustainable for the provider, with the result that financially excluded and underserved customers can access and use formal financial services rather than existing informal options.”2 China’s “Promoting Inclusive Financial Development Plan (2016–2020)” suggests that “inclusive finance refers to the provision of appropriate and effective financial services at an affordable cost to all social classes and groups in need of financial services, in accordance with the requirements of equal opportunity and the principle of commercial sustainability.”3 Although there are many definitions and specific expressions of inclusive finance, it has several common themes. First, inclusive finance seeks to serve vulnerable groups and help them escape from poverty. Second, it emphasizes the convenience and reasonable cost of financial services, which should be accessible and sustainable for consumers. Third, it is important to ensure that financial services are competitive, while maintaining a sound financial system. Fourth, inclusive finance should be commercially sustainable and prioritize the role of the market and complementary support policies.

1.1.3 Key Elements of Inclusive Finance4 1.1.3.1

Availability

The key driver of inclusive finance is whether consumers have easy access to financial products and services. Availability means that consumers have full physical access to a variety of services facilities (including branches, agents, and ATMs or other outlets and devices), so that they can easily choose and use a range of financial products and services. Lack of physical availability may result in high transaction costs (e.g., transportation costs, time spent) for groups with inadequate financial services. With the development of technology, remote service channels, such as mobile phones and computers, are becoming more important for the acquisition and use of financial products. Studies have shown that improving the availability of financial services will not only increase consumers’ use of financial products but will also engender benefits such as increases in income, promotion of productive investments, and employment (Burgess and Pande 2005; Bruhn and Love 2014).

2

GPFI (2011). Promoting Inclusive Financial Development Plan (2016–2020), publicly released by the State Council of China, January 15th, 2016. 4 World Bank Group and People’s Bank of China (2018). 3

4

1.1.3.2

1 Overview of Inclusive Finance

Diverse and Appropriate Products

To develop inclusive finance, a series of financial products and services must be designed to meet the needs of consumers, especially potential consumers who cannot have access to financial services. Appropriate design of financial products requires the needs of specific consumer groups to be identified and must enable product features that can meet those needs at a reasonable cost. Understanding of the characteristics and needs of underserved populations is helpful to designing more appropriate products. In terms of the appropriateness or quality of financial products, varied elements are involved, such as affordability, convenience, product matching, safety, safeguarding client dignity, and protecting client rights and interests. Consumers’ acquisition and use of products is more likely when products are more appropriate, which consequently would allow more groups without access or effective access to financial services to enter the formal financial system. On the contrary, general acceptance and long-term use of products may not be likely if product design is inappropriate, in which case the interests of low-income consumers may be damaged. Convenience is an important consideration in the appropriateness of financial products and services. For consumers, convenience is not only related to physical branches and channels but also associated with the timeliness and efficiency of financial services. Affordability is another key aspect of product and service quality.

1.1.3.3

Commercial Feasibility and Sustainability

From the perspective of consumers, available, diversified, and appropriate products are necessary elements of financial inclusion, but there is also a key challenge from the perspective of policy makers: How can a favorable financial ecosystem be built and maintained while allowing financial service providers to provide cost-saving and sustainable products and services? If the financial system cannot provide sustainable services to the underserved populations, then the long-term goals of financial inclusion will not be achieved. A diversified, competitive, and innovative market is essential for the sustainable development of financial inclusion. Many types of financial service providers, even those who adopt different business models for different customer groups or market segments, can jointly promote innovative products or delivery models and contribute to the diversified and sustainable development of the financial ecosystem. Additionally, to achieve a sustainable supply of financial services, a strong financial infrastructure that can support the effective transmission of information and transactions among a wide range of market participants must be established.

1.1.3.4

Security and Responsibility

To achieve the long-term development objectives of financial inclusion, financial products and services must be responsibly provided to consumers, which would not

1.2 Inclusive Finance and Inclusive Development

5

be feasible without the security and stability of the entire financial system. Therefore, to protect the rights and interests of financial consumers, the legal and regulatory environment must be complete and well-established. Financial administrative authorities must continuously evaluate relevant risks and consider trade-offs between different financial policy objectives.

1.2 Inclusive Finance and Inclusive Development Inclusive development seeks to provide equal opportunities, to expand opportunities for all social classes, especially those groups in need, and to achieve coordinated and sustainable social and economic development. Studies have shown that inclusive finance is essential for poverty eradication and inclusive economic and social development. Shaw (1973) noticed the impact of finance on income disparity at an early stage and argues that financial development is a very important way to narrow the income gap. Banerjee and Newman (1993) and Aghion and Bolton (1997) suggest that loan funds may be invested in key factors such as human capital, which in turn will lead to development that raises income levels. King and Levine (1993) and Rajan and Zingales (2003) believe that financial development would promote economic growth. According to Hannig and Jansen (2010), financial development is by no means the same as financial inclusion. Traditional financial policy objectives concentrate mainly on financial depth rather than financial breadth. As a policy goal, financial availability (inclusiveness) shares only a very weak substitutionary relationship with financial deepening. Maurer and Haber (2007) contend that in less developed regions with insufficient property rights protection and inadequate legal and regulatory systems, financial deepening and financial liberalization have not increased the poor’s access to the financial system. Instead, financial resources continue to flow to the rich and firms with strong social networks due to financing thresholds. With more access to financing, there are more ways for high income earners to get high-yield returns. The interests of the poor and middle class are squeezed, and the income gap continues to widen. Inclusive finance is relevant to lowering financial thresholds and promoting inclusive development. Using an analysis with cross-country data, Beck et al. (2009) find that financial inclusiveness could improve income equity and reduce poverty, and the more developed the financial system, the faster income inequality declines and poverty is reduced.

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1.3 International History of Financial Inclusion Practices Beginning in the 1970s, certain developing countries started to explore microcredit and other practices, which formed the rudiment of modern financial inclusion. Bangladesh, India, Indonesia, the Philippines, Brazil, Bolivia, Egypt, and other countries launched micro-credit projects, which are generally believed to have been pioneered by the Grameen Bank in Bangladesh. Mohamed Yunus experimented with micro-credit in Bangladesh in 1974 and founded the Grameen Bank in 1983, mainly targeting poor farmers (especially women) and providing small short-term loans Micro-credit proved to provide a basis for sustainable development under certain conditions and was adopted for reference by many countries and further upgraded into microfinance, which became a common practice to alleviate financial poverty in developing countries. The United Nations designated 2005 as the “International Year of Micro-Credit,” formally putting forward the concept of financial inclusion. This concept has been accepted by many countries. As financial inclusion theory and practice have developed, its connotations have been constantly enriched and extended, and the original focus on micro-credit has expanded to include the provision of multi-level and diversified financial services such as payments, remittance, deposits, loans, insurance, and financial management. Many countries recognize that financial inclusion is not only a tool for poverty alleviation but also necessary for economic growth, financial stability, monetary policy, and fiscal policy, among other things. In 2010, the G20 Leadership Summit in Seoul approved the “G20 Financial Inclusion Action Plan” and announced the establishment of the Global Partnership for Financial Inclusion (GPFI) as a multilateral mechanism to promote the development of financial inclusion under the G20 framework. In 2011, the World Bank began to conduct surveys on financial inclusion indicators in various countries to form a global financial inclusion database for quantitative monitoring of the level of financial inclusion development. In the same year, the representatives of dozens of members of the Alliance for Financial Inclusion (AFI), including China, gathered in Mexico to jointly issue the “Maya Declaration,” and made an official international commitment to the development of financial inclusion. At that time of heightened attention, more countries started paying attention to financial inclusion, innovative models started to emerge, and governments gradually started playing a more important role in the development of financial inclusion. In 2015, the United Nations adopted the “2030 Agenda for Sustainable Development,” which established the global sustainable development goal of “no one left behind.” The development goal focuses on eradicating poverty and hunger and promoting economic growth, comprehensively promoting social progress and safeguarding fairness and justice, strengthening the construction of ecological civilization, and promoting sustainable development. Financial inclusion was regarded as an important origin of force to achieve the goal, and the international community continued to enhance the input of resources. From 2016 to 2020, the GPFI introduced and released a series of high-level guidance documents such as the G20 High-Level

1.4 Main Models of Inclusive Finance

7

Principles for Digital Financial Inclusion, The G20 report on Digital Financial Inclusion: Emerging Policy Approaches, G20 Policy Guide: Digitisation and informality, G20 High-Level Policy Guidelines on Digital Financial Inclusion for Youth, Women and SMEs, G20 Fukuoka Policy Priorities on Aging and Financial Inclusion. During that period, the development of financial inclusion became a global consensus, scientific and technological innovation increasingly became an important way to accelerate the development of financial inclusion, and digitization became a significant way of developing global financial inclusion.

1.4 Main Models of Inclusive Finance5 Financial exclusion looks different in different countries and ant different times. For example, some remote areas have no bank branches, so local residents cannot obtain basic financial services. Due to information asymmetry and lack of collateral, it is difficult for low-income groups and small and micro-sized enterprises to acquire loans from formal financial institutions. Residents of many countries are prevented from opening bank accounts due to lack of valid identification documents. To address these issues, countries have actively explored various distinctive approaches to form their inclusive finance practices, which include the following models.

1.4.1 Agent Banking Model The agent banking model refers to an agreement between commercial banks and commercial entities such as pharmacies, post offices and supermarkets in areas lacking bank branches to provide local residents with basic financial services (such as savings, withdraws, balance checking, etc.) through their commercial points, to expand and extend financial services. Such arrangements have greatly reduced the costs for banks to set up additional branches in remote areas, improved the convenience for users’ to access financial products and services, and effectively increased the coverage and availability of financial services. Brazil was the first country to adopt the agent banking model. Considering the high fixed costs of establishing bank branches in remote areas and the difficulty of achieving profitability, Brazil has creatively adopted the agent banking model. By developing lottery betting shops, pharmacies, post offices, supermarkets, etc. as banking agents, banks have addressed the difficulties of establishing profitable branches in remote areas. Clients do not need to own a bank account to conduct business at such agencies, which greatly broadens the range of groups who can access financial services. Agent banks provide services such as allowing customers to open savings accounts, withdraw money, transfer payments, apply for bank loans, and 5

This section refers to Ma and Feng (2018).

8

1 Overview of Inclusive Finance

distribute government benefits and pensions Commercial banks that employ agents must take full responsibility for their business practices. To control the risks of payment and settlement and the operational risks of agent banks, regulatory authorities in Brazil have gradually relaxed restrictions on the financial business allowed to be conducted by agent banks and allowed different regulations for different types of agent financial services. Banks in Kenya and Mexico also grant permission to agents to provide basic financial services.

1.4.2 Micro-finance Model Micro-finance institutions (MFIs) are micro credit institutions (or other financial institutions) that specialize in providing financial products and services to poor, lowincome people and small and micro-sized enterprises. MFIs provide a range of microfinancial services including micro credit, savings, remittances, and micro insurance to their target population. Indonesia and Bangladesh are representative of countries with developing micro-finance systems. While microfinance in Indonesia relies mainly on government promotion and the participation of formal financial institutions, it is implemented in Bangladesh through micro-loan institutions represented by Grameen Bank. There are more than 50,000 MFIs in Indonesia, including commercial banks, rural banks, cooperatives, foundations, and credit unions. Government involvement has been the hallmark of Indonesian microfinance, with all levels of government helping to establish the MFIs. The Indonesian system is also characterized by all the participants being formal financial institutions. Bank Rakyat Indonesia (BRI) is one of the major state-owned commercial banks in Indonesia. Since 1996, it has established more than 4,000 village units across the country, becoming the largest sustainable MFI in Indonesia. Village units are set up in townships with a manager who is a local who is familiar with the local customs and culture. The manager is in charge of all loan operations within a certain area, and the bank specializes in providing loans to farmers. BRI has set up offices in villages that specialize in deposit taking and loan recovery. Grameen Bank of Bangladesh is one of the largest and most successful microloan financial institutions in operation today. Its methods have been replicated in more than 40 countries, including the United States. In 2006, Grameen Bank and its founder Muhammad Yunus were awarded the Nobel Peace Prize for their “efforts to promote economic and social development from the bottom of society.” As a “bank for the poor,” Grameen Bank is committed to helping the poor, especially rural women, escape poverty. The bank has developed a unique credit delivery mechanism and business model by mainly issuing unsecured micro loans with an average loan amount of up to USD 300 to support production, housing, education, and entrepreneurship (Box 1.1). As of the end of September 2022, Grameen Bank

1.4 Main Models of Inclusive Finance

9

had disbursed USD 35.35 billion in loans, with a 97% loan recovery rate, served more than 10 million members, and covered 94% of villages in Bangladesh.6 Box 1.1 Business Model of Grameen Bank (GB) 1. Strictly screen loan recipients. The bank’s aim is to alleviate poverty in ten areas: food, clothing, housing, education, health conditions, medical care, assets, The greater the needs of the borrower, the more likely an applicant is to receive a loan. To a certain extent, the bank has avoided the problem of loans being concentrated in rich farmers and has not deviated from its original purposes of granting universal access to banking services and alleviating poverty. Rural women are the main recipients of credit: 97% of the more than 10 million members are women. Most of them are not involved in commercial work and instead focus on household chores. Through credit stimulation and group education, GB has explored the business value of women’s idle time to improve their social status and gradually lift them out of poverty. 2. Develop a peer-to-peer aid loan model. A group of five borrowers will be formed on a voluntary basis. The groups’ social background and purposes for loans will be similar, and the members will help and supervise each other, which is the most important feature of GB’s operation. Every six to eight groups will be designated as a “center.” All centers will meet with bank employees weekly to learn and communicate. The team group implicitly guarantees the loans (but without legal liability) and the use of the funds will be verified through a system of team meetings and center meetings. In Grameen Model 1.0, if one person failed to pass the interview, the entire group would be denied loans. GB instituted a reform in 2000– 2005. In “Grameen 2.0,” personal loans replaced group lending. There are still groups of five borrowers, but each member of the group will be able to obtain a loan based on his or her own situation, and the loan amount, term, and repayment method are no longer the same. 3. Set conditions for loan disbursement according to the special qualities of the poor. Microfinance requires no collateral. The loan term is normally one year, with repayment in weekly installments. The distribution of subsequent loans is dependent on the repayment of the first loan. The borrowing group and bank staff will closely monitor the loans. Peer monitoring of borrowing group members will limit moral hazard and reduce the banks’ review and implementation costs. Banks increase transaction transparency through the central meeting system. 4. Introduce flexible and diverse financial products and services. With microloans and related training, GB has encouraged the poor to start their own

6

Data source: http://www.grameen.com.

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1 Overview of Inclusive Finance

businesses or to take the initiative to participate in various simple agricultural and manufacturing production activities to earn income and develop their potential. The main loan product of GB is the “basic loan” from which the client starts to take debits and credits. The amount and term of the loans vary from person to person. Diverse products and services such as housing loans, education loans, seasonal agricultural loans, borrower’s pensions, savings, loan insurance, and life insurance are also available for the poor. 5. Decentralized management and decision-making mechanisms. At GB, employees are carefully chosen and trained to cultivate a spirit of hard work and dedication to developing a culture of service to the poor. Sixty-five percent of the bank’s employees are front-line creditors who proactively visit borrowers in rural areas to ensure that the poor in remote villages are provided with financial assistance based on their labor and skill. Decentralized management and decision-making mechanisms are formed through enhanced employee training and gradual decentralization of management and decision-making authority at the grassroots level.

1.4.3 Mobile Payment Model Mobile payment (also known as “mobile phone payment”) allows users to conduct money transfers, pay bills, or make payments for goods or services using mobile terminals such as mobile phones. Kenya has made significant strides in the mobile payment arena. Kenya is a representative developing country in Africa whose financial services penetration rate is low, especially in remote and poverty-stricken areas. Although most residents have no bank accounts, the mobile phone penetration rate is high. Along with the development of the economy and the increase in population mobility, the demand for personal remittances between urban and rural areas in the country has gradually increased. However, limited by the financial service situation, many remittances must be completed with the assistance of post offices or bus drivers. Not only are these methods costly and inefficient, but there are potential safety hazards. Given that reality, Safaricom, the number one mobile phone operator in Kenya, launched its mobile banking system, M-PESA, in March 2007. Financial applications are integrated into the SIM card of clients’ mobile phones to facilitate financial services such as remittance transfers and account inquiries. Mobile payments in Kenya, which rely on an extremely mature SMS technology system, require no smartphone or mobile application to be downloaded by users. All it takes is a mobile phone and a SIM card issued by Safaricom to make a payment, significantly dropping the threshold for residents’ use of mobile payments.

1.4 Main Models of Inclusive Finance

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1.4.4 Simple Account Model The cost (both financial and time-wise) of opening a bank account in many countries is high due to factors such as anti-money laundering concerns and client screening. Clients are not only required to provide a series of supporting documents to meet the account opening requirements but keep a minimum deposit in the account or they will be charged an account management fee. With the aim of further improving the supply of financial products and services and reducing the cost of accessing them, countries such as Mexico have introduced simple accounts. Simple accounts are bank accounts that only serve basic functions such as withdrawing and depositing small amounts of cash, and accordingly, these accounts are less expensive for the clients to open and are less expensive for the bank to maintain it. Following amendments to the Anti-Money Laundering Law in 2009, the Mexican government streamlined the process of investigating clients and monitoring transaction information, and promoted simple accounts at low cost. In addition, banks in Mexico are required to clearly disclose fees for financial services, and no fees may be charged for opening deposit accounts and conducting payroll operations. Similarly, a micro-financial product with micro-savings (also known as micro-savings deposits) was developed by the Bangko Sentral ng Pilipinas, which exempts clients from the fees and requirements normally associated with opening a bank account. In Brazil, simple cash and savings accounts are available. The introduction of the simple account has successfully solved the dilemma between addressing policy concerns such as money laundering and the availability of financial services. This type of account, in addition to greatly reducing the risk of money laundering, also meets the daily financial needs of users by providing them with an account that provides basic functions such as savings and withdrawal. With the low cost and low risk of operation, financial institutions may lower the requirements and fees for opening such accounts, which to some extent eliminates barriers to obtaining financial services for low-income groups.

1.4.5 Science and Technology Application Model Some of the difficulties and barriers that cause financial exclusion will be easier to address with the development and application of technology. Science and technology have become the keys to facilitating inclusive finance to reduce costs, expand scales, and deepen the scope of financial services. India is a typical case of a country using science and technology to develop inclusive finance. India does not have a uniform national identity card system, which has limited the opening of bank accounts and the penetration of basic financial services. With the help of information technology, unique biometric identities (including iris scans and ten-finger prints) have been provided to over one billion people, and a unique 12-digit identification code has been issued to every Indian resident, which

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effectively solves the problem of lack of identification documents. As soon as residents open an account through biometric identification, they will be able to enjoy a range of financial services such as payments and loans. A “digital lock” and “digital signature” (or electronic signature) have also been introduced in India, which allows the sharing of information between parties and for digital and remote contracts. These five models are all supported by governments, which has been a driving force for the development of inclusive finance. On the one hand, it is possible for governments to integrate, coordinate, and guide all relevant parties to participate in inclusive finance through the strengthening of its system’s design and construction to create a favourable development environment. On the other hand, governments could also build a solid foundation for the development of inclusive finance by strengthening the financial infrastructure and providing basic bank accounts for citizens. In 2011, the National Commission for Inclusive Finance (CONAIF) was established in Mexico to coordinate, formulate, and implement national inclusive finance policies and medium- and long-term development goals. In contrast, the Bank of the Philippines has formed a high-level financial inclusion steering committee, headed by the bank’s governor, to develop and coordinate programs and policies on inclusive finance and to guide and monitor the implementation of financial inclusion programs. In India, the Mission for National Inclusive Finance (PMJDY) program was launched to provide basic bank accounts to all Indian citizens over the age of 10.

1.5 Financial Inclusion in China 1.5.1 The Official Proposals for Inclusive Finance in China On June 19, 2012, at the G20 Summit in Mexico, former Chinese President Hu Jintao pointed out: “The inclusive finance issue is essentially a development issue. We hope that all countries will step up communication and cooperation, improve consumer protection in all countries, jointly build a financial system that benefits all countries and their people, and ensure that people in all countries, especially developing countries, have access to modern, safe, and convenient financial services.” This was the first time a Chinese leader officially used the inclusive finance concept in public. On November 12, 2013, the Central Committee of the Communist Party of China (CPC) passed the “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform.” It officially proposed “the development of inclusive finance, the encouragement of financial innovation, and the enrichment of financial market levels and products,” and established “the development of inclusive finance” as an international strategy. On November 9, 2015, General Secretary Xi Jinping pointed out in his speech at the 18th Meeting of the Central Leading Group for Deepening Overall Reform that the purpose of developing inclusive finance is to improve the coverage, availability, and

1.5 Financial Inclusion in China

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provision of financial services. Inclusive finance should meet the growing financial needs of the people, and in particular, it should provide timely access to affordable, convenient, and safe financial services to farmers, small and micro businesses, lowincome groups, poor people in urban areas, the disabled, and the elderly. On December 31, 2015, the State Council publicly released the “Promoting Inclusive Financial Development Plan (2016–2020)” and defined “inclusive finance” as providing appropriate and effective financial services at an affordable cost to all social strata and groups in need of financial services based on equal opportunity requirements and the principle of business sustainability. It also points out that small and micro enterprises, farmers, urban low-income people, poor people, disabled people, the elderly, and other special groups are currently the focus service targets of China’s inclusive finance efforts. During the G20 Hangzhou Summit on September 4–5, 2016, three papers on inclusive finance, namely, “G20 High-Level Principles for Digital Financial Inclusion,” “G20 Financial Inclusion Indicators” and “G20 Action Plan on SME Financing Implementation Framework” became critical guiding documents for the global development of inclusive finance. The 2017 National Financial Work Conference proposed the construction of an inclusive finance system to strengthen financial services for small and micro enterprises in rural areas and remote areas, and promote the work requirement of targeted financial poverty alleviation. On October 28, 2019, the Fourth Plenary Session of the 19th CPC Central Committee proposed to “improve the modern financial system with high adaptability, competitiveness and inclusiveness,” and the Fifth Plenary Session of the 19th CPC Central Committee proposed to “enhance financial inclusiveness,” which endowed financial inclusion with more profound connotations.

1.5.2 Overview of Financial Inclusion in China This book introduces the development of financial inclusion in China from the micro, intermediate, and macro levels. The micro level refers to the providers of inclusive financial services, including banks, non-banking financial institutions, and informal financial organizations. The intermediate level refers to the financial infrastructure and services that ensure normal operation at the micro level, including the payment and clearing system that safeguards the free flow of funds and secure transactions, the credit information system that help institutions reduce their risks, mortgage registration and guarantee services for convenient financing activities, and network supporting organizations that enable the institutions to apportion the costs of financial infrastructure and services. The macro level refers to policies and the legal environment. The main participants include the central bank, financial departments, and other government departments. Currently, a multi-level service organization system has been fundamentally established at the micro level of financial inclusion in China, and a two-tier regulatory system of the central and local governments has been formed.

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Fig. 1.1 Overview of development and regulation of financial inclusion in China. Note * In progress; not yet enacted

At the intermediate level, the infrastructure for payment and clearing, credit information, mortgage registration, and financing guarantees, among others, have been continuously improving. At the macro level, a supporting policy system with cooperation between monetary and credit policies, fiscal and tax policies, and differentiated regulatory policies has been formed (Fig. 1.1).

References Aghion P. and Bolton P. A Trickle - Down Theory of Growth and Development with Debt Overhang [J]. Review of Economic Studies, 1997, 64:151–72. Allen K., Quinn J., Hollingworth S. et al. Becoming Employable Students and Ideal Creative Workers: Exclusion and Inequality in Higher Education Work Placements [J]. British Journal of Sociology of Education, 2013, 34 (3):431–452. Asia Development Bank. Finance for the Poor: Microfinance Development Strategy [R], 2000. Banerjee A, V., Newman A. F. Occupational Choice and the Process of Development [J]. Journal of Political Economy, 1993, 101(2):274–298.

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Beck T., Demirgüç-Kunt A., Honohan P. Access to financial services: Measurement, impact, and policies [J]. World Bank Research Observer, 2009. Bruhn M., Love I. The Real Impact of Improved Access to Finance: Evidence from Mexico [J]. Journal of Finance, 2014, 69(3):1347–1376. Burgess, R., and Pande R. Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment [J]. American Economic Review, 2005, 95(3): 780–95. Conroy, J. APEC and Financial Exclusion: Missed Opportunities for Collective Action? [J]. Asia Pacific Development Journal, 2005, 12 (1):53–80. GPFI (Global Partnership for Financial Inclusion). Global Standard-Setting Bodies and Financial Inclusion for the Poor: Toward Proportionate Standards and Guidance. A white paper prepared by CGAP on behalf of the G-20’s Global Partnership for Financial Inclusion. GPFI/CGAP, Washington, D.C., 2011. Hannig A., Jansen S. Financial Inclusion and Financial Stability: Current Policy Issues [J]. ADBI Working Paper, 2010(259). Kempson, H. E. and Whyley C. M. Understanding and Combating Financial Exclusion [J]. Insurance Trends, 1999, 18–22. King R. and Levine R. Entrepreneurship and Growth: Theory and Evidence [J]. Journal of Monetary Economics, 1993, 32(4). Leyshon A. and Thrift N. The Restructuring of the UK Financial Services in the 1990s [J]. Journal of Rural Studies, 1993, (9):223–241. Leyshon A. and Thrift N. Geographies of Financial Exclusion: Financial Abandonment in Britain and the United States [J]. Transactions of the Institute of British Geographers, 1995, 312–341. Ma Shaogang and Feng Sihui. Comparison of Major Models of Inclusive Finance Practices in the World [J]. Shanghai Finance, 2018 (1) (in Chinese). Maurer N., Haber S. Related Lending and Economic Performance: Evidence from Mexico [J]. The Journal of Economic History, 2007, 67(3): 551–581. Mitton L. Financial inclusion in the UK: Review of policy and practice [M]. Joseph Rowntree Foundation, 2008. Paramasivan, C. and Ganeshkumar, V. Overview of Financial Inclusion in India [J]. International Journal of Management and Development Studies, 2013, (2):45–49. Rajan R. G. and Zingales L. The Road to Prosperity: Saving Capitalism from Capitalists [J]. Transition, 2003, 14(7–9):1–3. Shaw E. Financial Depending in Economic Development [M]. Oxford University Press, New York, 1973. World Bank Group, People’s Bank of China. Toward Universal Financial Inclusion in China: Models, Challenges, and Global Lessons [M]. 2018. Zhang Shaohua and Zhang Xiaodong. Financial Inclusion: A Literature Review [J]. Comparison, 2015 (1) (in Chinese).

Chapter 2

Development of Inclusive Finance in China

Inclusive finance practices in China began in the 1990s, when microfinance was introduced as a poverty alleviation concept and a credit technology. To adapt to economic and social development needs, inclusive finance has gone through four stages: a micro-finance focus stage, a comprehensive improvement of rural financial services stage, a poverty alleviation stage, and a stage of strengthening financial services for small and micro enterprises.

2.1 The Micro-finance Focus Stage Micro-finance practices in China started in 1993, first with imitation and then moving to innovation. Initially, microfinance operated in the form of NGOs, mainly with international funding and technical assistance. In 1993, the Institute of Rural Development of the Chinese Academy of Social Sciences was the first to introduce Bangladesh’s Grameen Bank style of microfinance to China in line with international norms. Referring to this model, poverty alleviation economic cooperatives were established in Yi County of Hebei Province, Yucheng County and Nanzhao County of Henan Province, and Danfeng County of Shaanxi Province. The experiment of poverty alleviation through microfinance began. Later, test bases were established in Laishui County of Hebei Province in 2003, Jintang County of Sichuan Province, and Puyang City of Henan Province in 2006. Since 1995, the United Nations Development Program (UNDP) and the China Center for International Economic and Technical Exchanges have implemented micro-finance projects aimed at poverty alleviation in 48 counties and cities (cities) in 17 provinces. Subsequently, the UNDP also launched urban micro-finance projects for laid-off workers in Tianjin and some cities in Henan Province. Subsequently, other international organizations launched micro-finance projects in China, most of which are aimed at poverty alleviation and the development opportunities for women and children. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_2

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Implementation of China’s Millenium Poverty Alleviation Program, whose goal was to alleviate poverty in the new century, started in 1996 with micro-finance projects that draw on the technology and NGOs’ micro-finance experience. Poverty alleviation offices of the State Council, the civil affairs department, the Disabled Persons’ Federation, the Women’s Federation, and other departments successively participated in the project. These projects are mostly carried out in rural areas, but they also include some urban micro-finance projects for laid-off workers and low-income urban populations. With the support of central bank lending for agriculture issued by the People’s Bank of China (PBOC), rural credit cooperatives began to issue small unsecured loans and co-guaranteed loans to farmers in 1999 and 2000, respectively. This marked the beginning of formal financial institutions entering the micro-finance field. The goal of microfinance extends from mere poverty alleviation to serving general farmers as well as small and micro enterprises. Since then, commercial banks have also carried out various types of micro-finance businesses. At present, microfinance is still an important inclusive finance product, but its loan target has been expanded from traditional farmers to rural diversified enterprises, individual businesses, and various micro-enterprises. The loan has also gradually increased from the initial RMB 25,000 to RMB 300,000 to RMB 500,000.

2.2 Comprehensive Improvement of Rural Financial Services Stage In 2003, China launched the pilot reform of rural credit cooperatives, comprehensively promoting rural financial reforms and innovation. During this period, the government focused on rural finance and promoted solutions to difficult key problems in rural finance.

2.2.1 Reforming Financial Institutions Related to Agriculture and Rural Areas and Enhancing the Capability of Rural Financial Services IBy clarifying rural credit cooperatives’ property rights relations, providing financial support to resolve non-performing assets of rural credit cooperatives and handing over the management of rural credit cooperatives to local governments the central government has carried out comprehensive reform of rural credit cooperatives, and consolidated its position as the main force of rural financial services. The PBOC has promoted the reform of the Agricultural Bank of China. The state injected RMB 130 billion and stripped off RMB 815.7 billion in non-performing assets. The Agricultural Bank of China (ABC), one of China’s largest state-owned commercial banks,

2.2 Comprehensive Improvement of Rural Financial Services Stage

19

has carried out a pilot project for establishing a division focused on implementing the government’s three-pronged policy of serving the agricultural sector, rural communities, and farmers. The government has established the Postal Savings Bank of China to promote the return of funds to agriculture and rural areas by engaging in a micro-loan business mainly focusing on small loans in rural areas.

2.2.2 Enriching the Rural Financial Service System and Improving Inclusive Finance Supply In 2005, pilot programs began that involved commercial micro-finance institutions funded by private capital. The first batch of small loan companies were established in Shanxi, Inner Mongolia, Sichuan, Shaanxi, and Guizhou. Small loan companies only lend money but do not deposit it, and the loans are of various small amounts. The target of the loans were mainly farmers, sole proprietors, and small enterprises. The pilot programs focused on improving rural financial services to agricultural businesses, rural areas, and farmers. In 2006, the government relaxed access conditions for banking institutions that wanted to expand into rural areas, thereby allowing industrial funds and private capital to establish new banks in those areas. New rural financial institutions such as Rural Banks, rural capital cooperatives, and loan companies were established.

2.2.3 Comprehensively Promoting Innovation in Rural Financial Products and Services Since 2008, the PBOC has promoted innovation in rural financial products and services to respond to the large differences in the financial needs of rural people and their lack of collateral. Micro-credit loans to rural households and microfinance in rural areas have been vigorously developed, and the scope of mortgage guarantees has expanded. In the inter-bank bond market, collective bonds for small and medium-sized rural enterprises have been explored and issued, and financing channels for small agriculture-related enterprises have been expanded. Agricultural production and management enterprises have been encouraged to use futures trading mechanisms to avoid market risks. By 2010, 13 agricultural futures had been listed on China’s futures market, basically forming a system of agricultural futures covering grain, cotton, oil, and sugar. In 2009, the value of agricultural futures traded in China was RMB 62.18 trillion. China was already the world’s largest agricultural futures market by volume, according to the statistics of US Futures Industry Association.1

1

China Rural Finance Service Report 2010.

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2.2.4 Improving the Agricultural Insurance System In 2006, the government advanced reforms and the development of the agricultural insurance system to establish the agricultural risk prevention and relief mechanism combined with policy-based agricultural insurance and financial subsidies The multi-level risk transfer and risk-sharing mechanism for agricultural catastrophes was improved. An agricultural reinsurance system, with financial support from the central and local governments, was explored and established. In 2007, a pilot program of policy-based agricultural insurance was launched, and for the first time, the central government provided subsidies for agricultural insurance premiums and preferential tax policies for insurance companies. Policy-based agricultural insurance now covers the whole country. In 2012, the State Council promulgated the first “Agricultural Insurance Ordinance,” which defines the development principles, supporting policies, operation standards, and supervision requirements of agricultural insurance in the form of law, laying a legal foundation for the sound and healthy development of agricultural insurance. The government guides farmers to insure and encourages insurance institutions to accept insurance through supporting policies such as premium subsidies and tax incentives. With the support of fiscal and tax policies, policy-based agricultural insurance has developed rapidly, with coverage expanding and insurance types increasing. By 2010, the number of agricultural insurance agencies increased from 6 to 19, and the area covered by crop and forest insurance reached 1.16 billion mu, an 18-fold increase over 2006. The number of the types insurance related to the national economy and people’s livelihoods increased from 5 in 2007 to 14, covering all major grain-producing areas.2 In addition, the insurance industry has actively expanded the county insurance market, carried out small personal insurance pilots, extended the geographical depth of insurance services to remote areas, and expanded the service target to low-income groups.

2.2.5 Vigorously Promoting the Construction of the Financial Infrastructure in Rural Areas In this stage, policy makers sought to build a rural credit information system and improve the rural credit environment. Through the establishment of a national unified basic database for enterprise and individual credit information, PBOC established a national unified basic database for the credit information of both enterprises and individuals, which allowed credit files for more than 13 million enterprises and nearly 600 million natural persons (2010 data) to be established. The credit information system’s coverage in rural areas has expanded gradually. Simultaneously, to coordinate and promote the development of micro-finance business, the government has continuously promoted the construction of “credit households, credit village, and credit 2

China Rural Finance Service Report 2010.

2.2 Comprehensive Improvement of Rural Financial Services Stage

21

towns” in rural areas. Credit files and a credit evaluation system for farmer households have been established to facilitate loans by financial institutions. Another policy focus is improving the payment environment in rural areas. The PBOC designed flexible and diverse access methods to allow rural financial institutions, such as rural credit cooperatives, rural commercial banks, and Rural banks, to access the large and small payment systems and check image exchange system, which made funds transfer channels for rural financial institutions smoother. In 2005, a bank card service for migrant workers was piloted, which effectively solved the security problem that migrant workers faced when carrying large amounts of cash back home. In 2010, the PBOC began to develop the service points of helping farmers withdraw money to facilitate the “last step” of financial services. New payment services such as mobile phone and online payments have recently been launched in rural areas.

2.2.6 Initially Establishing a System of Policy Support for Rural Finance In 2008, the government implemented award program for incremental agro-related loans specifically to county-level financial service providers and special subsidies for the expenses of rural financial service providers. The PBOC implemented a lower reserve requirement ratio for rural financial institutions and increased its support for central bank lending for agriculture. Supervision fees for small and medium-sized financial institutions in rural areas were waived, and a green channel was set up that allowed rural branches and financial products related to agriculture to gain market access in rural areas.

2.2.7 Constantly Improving the Rural Financial Supervision System In 2007, the PBOC implemented a special statistics system for agriculture-related loans. In 2010, it issued “An Assessment Method to Encourage County-Level Legal Person Financial Institutions to Use a Certain Proportion of New Deposits in Local Loans,” laying a foundation for monitoring and guiding the release of agriculturerelated loans. Regulatory authorities implemented differentiated supervision policies to arouse the enthusiasm of financial institutions to supporting agriculture.

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2.3 Poverty Alleviation Stage One of the important goals of inclusive finance is to benefit vulnerable groups and lift them out of poverty. Inclusive finance practices in China began in the field of poverty alleviation and they continue to innovate and develop. In 2015, the central government made comprehensive plans for the battle against poverty, with the aim of lifting the rural poor out of poverty by 2020. During this stage, to promote the goal of poverty alleviation, the financial sector carried out many innovations in poverty alleviation and increased their input of resources.

2.3.1 Set up Targeted Micro-finance Products for Poverty Alleviation In 2015, the government set up the Microcredit for Poverty Alleviation, which is a loan available to registered poor households aged 18–65 that allows them to develop certain industries. The loans can only be used to develop productive industries with distinctive advantages that can lift poor households out of poverty and cannot be used for nonproductive expenditures such as building houses and purchasing household goods. The amount of the loan must be below RMB 50,000 and the term is three years or less. No guarantee or mortgage is required. The program lends money at a benchmark interest rate that includes a discount, and county-level governments set up risk compensation. By the end of 2020, outstanding central bank lending for poverty alleviation posted RMB 710 billion.3

2.3.2 Innovate Policy Tools In 2016, the PBOC created a new central bank lending policy for poverty alleviation. The program covered 1,243 poverty-stricken counties (832 state-designated povertystricken counties and 411 key counties for poverty alleviation and development at the provincial level). The recipients were four kinds of local corporate financial institutions, namely, rural commercial banks, rural cooperative banks, rural credit cooperatives, and rural banks within the administrative areas in the poverty-stricken counties. The central bank loans for poverty alleviation have a more favorable interest rate than the original central bank loans for agriculture in poor areas, and the term is up to five years. Financial institutions are required to give priority to registered poor households and those enterprises and rural cooperatives that help the poor find

3

China Rural Finance Service Report 2020.

2.3 Poverty Alleviation Stage

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jobs. In the first year, RMB 112.7 billion in loans were distributed.4 To promote the development of relocation projects for persons living in inhospitable areas,5 in 2016, the PBOC set up special financial bonds totaling RMB 350 billion, which were issued by China Development Bank and Agricultural Development Bank in the inter-bank bond market.

2.3.3 Development-Oriented and Policy-Oriented Banks Set up Financial Poverty Alleviation Departments In 2016, China Development Bank and the Agricultural Development Bank set up poverty alleviation finance divisions within their institutions. The divisions specialize in poverty alleviation but have special management and separate accounting to keep the costs low to allow for just a small profit. They also focus on implementing targeted poverty alleviation strategies and infrastructure construction in poor areas and effectively increase poverty alleviation through finance. In the field of services, China Development Bank focuses on supporting the construction of infrastructure, including educational facilities, medical facilities, transportation, water conservancy and electricity, the renovation of dilapidated rural houses, and the improvement of living environments in poverty-stricken areas. Agricultural Development Bank gives special support to the stockpiling of grain, cotton and oil, agriculture industrialization, and the development of special industries in poor areas.

2.3.4 Improve Insurance Protection The government gives full play to the role of insurance in ensuring the development of industries in poor areas and enhancing the production and life of the poor. The insurance companies have developed and extended agricultural insurance products for registered poor people, including coverage for accidental injuries, disease, and medical treatment, to raise the reimbursement rate for medical expenses. Recognizing the financing and credit enhancement function of insurance, the government has developed agricultural insurance policies, small loan guarantee insurance, and programs that facilitate direct investment of insurance funds. In 2016, the government set up the Poverty Alleviation Investment Fund of China for the insurance industry, with a total funds of about RMB 10 billion, to be used for resource development,

4

China Rural Finance Service Report 2016. Poverty alleviation relocation refers to relocating poor people living in areas with poor natural conditions, fragile ecological environments, or frequent natural disasters to other areas to help them gradually alleviate poverty by improving the working and living conditions, adjusting the economic structure, and expanding income channels.

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industrial park construction, and construction of urbanization in poor areas through market-oriented operations.

2.3.5 Increase Support for the Capital Market The CSRC supports eligible enterprises from poor areas to get listed in the national share transfer system through the “green channel.”6 By the end of 2018, 12 enterprises in poor counties had gone public through the green channel, raising RMB 6.9 billion.7 For enterprises registered in poor areas that apply for listing in the national share transfer system of small and medium-sized enterprise, the listing fees are reduced or waived. By the end of 2020, the system had served 305 listed companies in poor areas, and 171 listed companies in poor areas had raised RMB 20.562 billion.8 The National Association of Financial Market Institutional Investors (NAFMII) creatively launches poverty alleviation notes, which are special debt financing instruments from which the issuer will use a certain proportion of the raised funds for targeted poverty alleviation. NAFMII issued the first batch notes in March 2017. By the end of 2020, it had supported 35 enterprises in 20 provinces by issuing poverty alleviation notes totalling RMB 50.42 billion. The funds raised are mainly used for targeted poverty alleviation projects such as industrial development and infrastructure construction in poor areas, which has helped alleviate poverty in more than 100 poor counties.9

2.4 Stage of Strengthening Financial Services for Small and Micro Enterprises Ninety percent of Chinese enterprises are micro, small, and medium-sized enterprises. They contribute to more than 50% of tax revenue, 60% of GDP, 70% of technological innovation, and 80% of urban employment. They play an important role in promoting economic growth, increasing employment, and stimulating innovation. Since 2018, uncertainties in the global economy have increased, risks and hidden dangers that have accumulated over the years in the Chinese economy have been exposed, and small and micro businesses are finding it more difficult to operate and 6

The CSRC applies the policy of “examining right after report, issuing right after pass” for two types of enterprises that apply for an initial public offering or listing in the national share transfer system: (1) enterprises that are registered and have their main production and operations in poor areas that have carried out production and operations for at least three years and that have paid income tax for at least three years, or (2) enterprises that are registered in poverty-stricken areas that have paid income tax of no less than RMB 20 million in the previous year and that have promised not to change their registered place of business for three years after listing. 7 China Rural Finance Service Report 2018. 8 China Rural Finance Service Report 2020. 9 China Rural Finance Service Report 2020.

2.4 Stage of Strengthening Financial Services for Small and Micro Enterprises

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obtain financing. At this stage, the financial sector focused on improving the capability and level of financial services for small and micro enterprises and promoting the coverage and availability of financial services for them.

2.4.1 Further Improve the Inclusive Finance Service System Medium and large banks set up inclusive finance divisions to make their services accessible to small and micro businesses (MSB). Agricultural Bank of China has established an inclusive finance division in addition to its agriculture, rural, and rural finance division, which mainly serves small and micro enterprises. The Industrial and Commercial Bank of China, the Bank of China, Construction Bank, and the Bank of Communications have established their own inclusive finance divisions. By the end of 2020, all 12 joint-stock banks in China had set up inclusive finance business units or business departments specifically responsible for inclusive finance. In the allocation of internal resources such as capital, funds, human resources, and financial information, the banks have continued to give more attention to small and micro business lines. The banks have improved the credit management system, ameliorated the credit approval process, completed the risk control mechanism, and reduced the cost of loans while improving the efficiency of financial services for small and micro enterprises.

2.4.2 Innovate Loan Products and Services To address the shortage of small and micro enterprises’ mortgage assets, the banks has further expanded the scope of collateral (pledge) and innovated intellectual property financing products such as patent and trademark rights. The banks have also actively innovated the credit model and relied more on enterprises’ good credit records, market competitiveness, and financial status to issue unsecured loans to reduce reliance on mortgage guarantees. Development-oriented and policy-oriented banks cooperate with local small and medium-sized banks by offering wholesale capital central bank lending, which is used specifically for small and micro enterprises. These banks combine their policy and capital with commercial banks’ resources and human resources to realize complementary advantages. Expand diversified financing channels. The PBOC has improved the bill market system and promoted innovation in the bill products of small and micro enterprises. The PBOC has also created bond financing support tools for private enterprises. NAFMII innovated debt financing tools for venture capital enterprises, asset-backed notes (ABN), and other products specifically for the financing needs of micro, small, and medium-sized enterprises. Further, the CSRC has expanded channels of direct financing for micro, small, and mediumsized enterprises. PBOC has encouraged commercial banks to issue special financial

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bonds for small and micro enterprises and raise funds for loans to them. Banking financial institutions are supported in issuing asset-backed securities on loans to small enterprises. The CSRC has deepened reform of the Growth Enterprise Market and the small and medium-sized stock exchanges and lowered the entry threshold for enterprises. By the end of 2020, there were 8,187 newly listed companies, with and a total market value of RMB 2.65 trillion; small and medium-sized enterprises accounted for 94% of the newly listed companies.10 Venture capitalists and other private equity funds continue to increase their investment.

2.4.3 Improve the Policy Support System The PBOC has made targeted cuts to the required reserve ratio11 and given more support to central bank lending for small enterprises.12 Additionally, the CBIRC has improved differentiated supervision targets, lowered capital supervision requirements for loans to small and micro enterprises, increased its tolerance for nonperforming loans, and expanded channels for the disposal of non-performing assets of small and micro enterprises. Moreover, interest income from financial institutions’ loans to small and micro businesses is exempted from value-added taxes.

2.4.4 Establish Risk-Sharing and Credit Enhancement Mechanisms The insurance companies have innovated insurance services and provided more flexible loan guarantee insurance products and credit enhancement support for small and micro businesses. Insurance institutions and banking financial institutions established a risk-sharing mechanism. The policy-based financing guarantee system has been improved. A national financing guarantee fund was established in 2018, and the coverage of local financing guarantee institutions was expanded. Local governments continue to innovate risk compensation mechanisms and strengthen credit enhancement and risk compensation for small and micro enterprises.

10

Sources: www.neeq.com.cn. The PBC implemented targeted cuts to required reserve ratios for some financial institutions or specific financial sectors. Generally, the cuts target small and medium-sized financial institutions, or depending on financial institutions’ support to key areas of the national economy, the policy lowers the deposit reserve ratio for financial institutions that meet the assessment standards, releases more funds of financial institutions, and serves weak links such as small and micro enterprises. 12 In 2014, the PBC set up re-lending for small enterprises, which is used for five qualified types of local legal person financial institutions, namely, urban commercial banks, rural commercial banks, rural cooperative banks, rural banks, and private banks. The purpose is for these banks to issue inclusive loans to small and micro enterprises. 11

References

27

2.4.5 Strengthen the Use of Financial Technology Financial institutions use modern information technology to strengthen cooperation with third-party internet companies, promote the combination of fintech and small and micro credit, improve the adequacy of information access, improve credit evaluation models, innovate online financial products and service models, and enhance the availability and convenience of financing for small and micro enterprises. Local governments are encouraged to integrate information resources of government departments by relying on big data cloud computing and other information technology means, building information-sharing platforms for financial services, and facilitating the acquisition of customers by financial institutions.

References PBC. China Rural Finance Service Report 2010 [R]. China Financial Publishing House, 2011 (in Chinese). PBC. China Rural Finance Service Report 2016 [R]. China Financial Publishing House, 2017 (in Chinese). PBC. China Rural Finance Service Report 2018 [R]. China Financial Publishing House, 2019 (in Chinese). PBC. China Rural Finance Service Report 2020 [R]. China Financial Publishing House, 2021 (in Chinese).

Chapter 3

China’s Financial Inclusion Policy Framework

China has gradually established policies to support inclusive finance development and has constantly adjusted and optimized it to further its long-term goals of inclusive finance for poverty alleviation and supporting small and micro enterprises, agriculture, rural areas, and farmers. A complete policy support system has been formed, including monetary and credit policies, fiscal and tax policies, financial supervision policies, and pilot innovation policies.

3.1 Strategic Planning for Financial Inclusion In 2013, China established a national strategy for “developing inclusive finance.”1 Inclusive finance development in China is characterized by diversified service providers, wide service coverage, and a high utilization rate of mobile internet payment. The number of bank accounts per capita, the density of bank branches, and provision of other basic financial services have reached the international middle and upper levels.2 However, the development of inclusive finance development still faces some problems, such as unbalanced services, unhealthy systems, an incomplete legal system, incomplete infrastructure construction, and lack of business sustainability.

1

On November 12, 2013, the Third Plenary Session of the 18th CPC Central Committee adopted the “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform,” and officially proposed “developing inclusive finance.” 2 By the end of 2014, China’s banking and financial institutions had 216,000 branches, 1.247 million ATMs and other self-service devices, and 15.935 million point-of-service machines. The coverage of banking outlets reached 96% in townships, coverage of basic financial service points in rural areas reached 92%, and insurance services coverage reached 93% in townships. The average person in China has 0.4 mobile payment electronic accounts. © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_3

29

30

3 China’s Financial Inclusion Policy Framework

Thus, it is necessary to strengthen the top-level design, further clarify the development direction and main tasks, and better promote the development of inclusive finance. To promote the development of inclusive finance, according to the international standard,3 China promulgated the “Promoting Inclusive Financial Development Plan (2016–2020)” (the “Plan”). The Plan emphasized that the development of inclusive finance should draw on international experience as well as reflect Chinese characteristics, should combine government guidance and market leadership, and should both improving basic financial services and improving financial services in key areas. The Plan focused on effectively improving the availability of financial services coverage and significantly increasing people’s access to financial services. It proposed that by 2020, inclusive finance services and security systems should be established in line with the building of a moderately prosperous society. Specifically, farmers, small and micro enterprises, low-income groups, the poor in urban areas, the disabled, and the elderly should have timely access to affordable, convenient, and safe financial services. The Plan required the China Banking Regulatory Commission and the PBOC to take the lead in establishing coordination for promoting inclusive finance. Local governments at all levels should ensure good implementation. The Plan called for pilot projects to be carried out in small areas first and then spread after testing and tweaking. The main points of the Plan include the following: Perfect the inclusive finance service system with diversity diversified financial service providers and wide coverage. The government spearheading spearheaded the initiative by mobilizing traditional, new, large, small, online and offline financial organizations, guiding institutions, and organizations of all types to identify their market positions and use their respective strengths in light of their own characteristics. Innovate financial products and services. The PBOC was tasked with actively guiding all kinds of inclusive finance service providers to reduce financial transaction costs, extend service radiuses, and expand the breadth and depth of inclusive finance services by means of modern information technology such as the internet. Accelerate the development of financial infrastructure. Under the Plan, the PBOC was to improve the inclusive finance credit information system, promote the construction of a rural payment environment, and establish an inclusive finance statistical system. Improve inclusive finance’s system of laws and regulations. The Plan required the government to gradually formulate and improve laws and regulations related to inclusive finance, to create a systematic legal framework, to clarify the rights and obligations of the suppliers and demanders of inclusive finance services, and to ensure that inclusive finance services had pertinent laws and regulations.

3

The G20 adopted the finance framework package as one of the nine guidelines for action, stressing the importance of formulating and releasing inclusive finance development plans based on international standards and domestic legislation in relevant fields.

3.2 Money and Credit Policy

31

Create policy guidance and incentives. Under the Plan, the PBOC and other government sectors were to improve monetary and credit policies, improve differentiated incentive mechanisms for financial regulation, and consider the role of fiscal and tax policies. Local governments were to strengthen support for inclusive finance. Strengthen inclusive finance education and financial consumer protection. The Plan called on the government to promote universal education of financial knowledge, foster public awareness of financial risks, improve financial consumers’ awareness and ability to protect their rights, and guide the public to care about, support, and participate in inclusive finance practices.

3.2 Money and Credit Policy 3.2.1 Monetary Policy The PBOC has made comprehensive use of monetary policy tools such as required reserve ratios, central bank lending, and rediscounting to continuously guide financial institutions to increase their support for inclusive finance concerns such as agriculture, rural areas, farmers, and small and micro enterprises.

3.2.1.1

The Required Reserve Ratio (RRR)

The required reserve ratio refers to the minimum amount that a financial institution must keep according to the central bank to ensure that the institution has enough liquid funds to ensure customers’ withdrawals and funds settlement. The central bank adjusts the required reserve ratio to adjust the credit capital supply capacity of financial institutions. (a) Differentiated RRR system In recognition of the positive incentive role the required reserve policy plays in supporting agriculture, rural areas, farmers, and small and micro enterprises, the PBOC has implemented different required reserve ratios for different types of financial institutions. A favorable required reserve ratio is given to rural credit cooperatives, rural commercial banks, rural cooperative banks, village banks, finance department of agriculture, rural areas and farmers of the Agricultural Bank of China, and other major agriculture-related institutions. By the end of 2020, rural commercial banks, rural cooperative banks, rural credit cooperatives, and village banks still had a required reserve ratio of 6%, which was 5% points lower than large commercial banks.4

4

China Rural Finance Service Report 2020.

32

3 China’s Financial Inclusion Policy Framework

(b) Targeted RRR cuts The central bank implements targeted RRR cuts to reduce required reserve ratios in certain financial institutions or certain financial sectors. In 2014, the People’s Bank of China began to implement targeted cuts to RRRs of financial institutions that serve small and micro enterprises and agriculture, rural areas, and farmers. In April 2014, the reserve ratios for county rural commercial banks and county rural cooperative banks were cut by 2% points and 0.5% points, respectively. In June, the reserve requirement ratio was lowered by 0.5% points for all types of commercial banks with prudent operations that lend to a certain proportion of agricultural needs, rural areas, farmers, or small and micro businesses.5 In September 2017, the PBOC extended and optimized the original targeted RRR cuts to unified targeted RRR cuts for financial institutions that offered certain inclusive finance loans. The PBOC made the following changes. first, the scope of loans include inclusive finance loans of less than RMB 5 million6 to small and micro enterprises, operating loans for individual industrial and commercial households, loans for farmers’ production and operation, start-up guarantee (for laid-off and unemployed personnel) loan, consumption loans for officially registered povertystricken households and student loans. Second, the scope of financial institutions included expanded to state-owned commercial banks, the Postal Savings Bank of China, joint-stock commercial banks, urban commercial banks, non-county rural commercial banks, and foreign banks. Third, the standard for RRR cuts changed to two levels: 0.5% points and 1.5% points.7 In January 2018, targeted cuts to RRRs were implemented in all large and medium-sized commercial banks, benefiting nearly 80% of urban commercial banks and 90% of non-county rural commercial banks. About RMB 450 billion has been released from the RRRs. 5

That is, last year’s new agriculture-related loans accounted for more than 50% of the total new loans, and the balance of agriculture-related loans accounted for more than 30% of the total loan balance at the end of the previous year. The new small and micro loans accounted for more than 50% of the total new loans in the previous year, and the balance of small and micro loans accounted for more than 30% of the total loan balance at the end of the previous year. Institutions that met the standards for this targeted cut to RRRs included about two-thirds of urban commercial banks, more than 80% of non-county rural commercial banks, more than 90% of non-county rural cooperative banks, and several joint-stock banks and foreign banks. 6 Effective in 2019, targeted cuts to RRRs for small and micro business loans were adjusted to include a single account of less than RMB 5 million to a single account of less than RMB 10 million. 7 The first level is the proportion of inclusive finance loan increments in all new RMB loans reached 1.5% in the previous year, or at the end of last year, the loan balance ratio of inclusive finance field to all RMB loan balance reached 1.5. They enjoy a 0.5% point reserve ratio discount. This criterion adapts to the actual lending situation of most commercial banks in the inclusive finance field. The second level is that the proportion of inclusive finance loan increment in all new RMB loans reached 10% last year, or at the end of last year, the loan balance ratio of inclusive finance field to all RMB loan balance reached 10. They enjoy a 1.5% point reserve ratio discount. This is a relatively high standard that can only be met by commercial banks that are prominent in the inclusive finance sector.

3.2 Money and Credit Policy

33

In May 6, 2019, the PBOC announced that it would lower the RRR for countylevel rural commercial banks to the same as the RRR for rural credit cooperatives. China’s new RRR framework featuring “three levels and two preferential treatments” was formed. “Three levels” refers to setting the RRR as three benchmarks based on the systemic importance, institutional nature, and service positioning of a financial institution. The first level is the RRR of large banks, which stood at 11% at the end of 2020. The large banks include the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, China Construction Bank, the Bank of Communications, and the Postal Savings Bank of China. The second level is for mid-sized banks: at the end of 2020, their RRR stood at 9%. Medium-sized banks include mainly joint-stock commercial banks and urban commercial banks. The third level is for small banks, whose RRR was 6% at the end of 2020. Small banks include rural commercial banks, rural credit cooperatives, rural cooperative banks, and Rural banks. “Two preferential treatments” refers to two discounts in addition to three basic levels. First, banks in the first and second tiers that meet the policy assessment criteria of targeted cuts to RRRs can enjoy a discount of 0.5% or 1.5% of the RRR. Second, banks serving counties that reach a certain percentage of new deposits using local loan assessment standards8 will enjoy a preferential rate of 1%.

3.2.1.2

Central Bank Lending

Central bank lending refers to loans to financial institutions from the central bank. Since the establishment of central bank lending for agriculture in 1999, central bank lending has evolved into an important tool for the PBOC to support inclusive finance. (a) Central bank lending for agro-related businesses Central bank lending for agriculture involves PBOC lending to local corporate financial institutions to help them expand agriculture-related credit and reduce financing costs for agriculture-related businesses, rural areas, and farmers. In 1999, the PBOC began to issue loans for agriculture to rural credit cooperatives. These loans mainly allowed rural credit cooperatives to issue loans to farmers, focusing on the reasonable funding needs of farmers engaged in the planting industry, the breeding industry, the agricultural and sideline products processing industry, and the storage and transportation field. From 1999 to 2007, outstanding central bank lending is RMB 1.2 trillion.9 Since then, the PBOC has continued to increase central bank lending for agriculture, improve management methods, and broaden the scope of application. At present, the recipients of central bank lending for agriculture include rural credit cooperatives, rural cooperative banks, rural commercial banks and village banks, as well as other local legal person financial institutions approved by the PBOC. The use 8

This is an assessment policy to guide financial institutions to use new deposits locally, as detailed below. 9 China Rural Finance Service Report 2008.

34

3 China’s Financial Inclusion Policy Framework

of central bank lending for agriculture has been expanded from loans for farmers to other agriculture-related loans. Central bank lending for agriculture implements the principle of “quota management, specified usage and establishment of a ledger.” “Quota management” means that the PBOC determines a quota for lending for agriculture according to the macrocontrol needs of monetary policies and assigns the quota level by level through branches. “Specified use” means that the borrower must use all the funds received by the central bank to issue agriculture-related loans. In addition, the interest rate of agriculture-related loans should be determined based on the actual central bank lending for agriculture interest rate with a spread, and the specific range is stipulated by the PBOC. “Establishment of a ledger” means that the borrower must establish a ledger for recording the terms of agriculture-related loans, including the amount, maturity, interest rate, and the usage of the loan, and submit the ledger to the PBOC on a quarterly basis. The PBOC must conduct daily monitoring and on-site verification of the interest rate and amount of loans for investment purposes. Loans from the central bank lending for agriculture program can be issued for three months, six months, or one year. They can be renewed twice for up to a total of three years. (b) Central bank lending for micro and small businesses In 2014, the PBOC established central bank lending for micro and small businesses (MSBs), which is specifically used to support financial institutions’ expansion of their lending to MSBs. The recipients include eligible small urban commercial banks, rural commercial banks, rural cooperative banks, village banks, and private banks. Loan issued pursuant to the central bank lending for MSBs program can be for three months, six months, or one year, and they can be extended twice, with a maximum term of three years. The PBOC has strengthened supervision over the use of funds lent to financial institutions to ensure that central bank lending for MSBs is used to support small and micro enterprises. During the period of using the central bank lending for MSBs, the financial institute should keep the increment of loans to small and micro enterprises not lower than the total amount of central bank lending to small enterprises granted by the PBOC. And the weighted average interest rate of loans to small and micro enterprises from the institutions using funds from central bank lending to MSBs should be lower than the weighted average of the interest rate of loans to small and micro enterprises of the same grade issued by financial institutions using other funds at the same time. (c) Central bank lending for poverty alleviation To help alleviate poverty, in 2016, the PBOC set up central bank lending for poverty alleviation to specifically help local corporate financial institutions in poor areas expand rural credit lending. Central bank lending for poverty alleviation has two main features that differ from other central bank lending programs. One is more favorable interest rates. The other is that loans can be extended a maximum of four times, so the lending period is up to five years.

3.2 Money and Credit Policy

35

Table 3.1 Central bank lending and central bank discounts situation Year

Outstanding central bank lending to support rural development

Outstanding central bank lending for MSBs

Outstanding central bank lending for poverty alleviation

Outstanding central bank discounts

2010

723

–

–

–

2012

1375

–

–

–

2014

2154

524

–

1372

2016

2089

537

1127

1165

2018

2870

2172

1822

3290

2020

4572

9756

2153

5784

2022/ 03

5161

13,315

1713

6247

Source The People’s Bank of China “Monetary Policy Report,” author collected. Unit: RMB 100 million

Contiguous poverty-stricken areas and the designated counties for China’s poverty alleviation work can receive central bank lending for poverty alleviation. There are four types of local corporate financial institutions, including rural commercial banks, rural cooperative banks, rural credit cooperatives, and Rural banks within the jurisdiction of the counties designated for provincial poverty alleviation and development work (a total of 1,243 counties) that are not included. The PBOC requires financial institutions to use poverty alleviation funds to extend agriculture-related loans in poor areas. In particular, financial institutions should give priority to supporting registered poor households and rural cooperatives that drive employment and development of poor households, so that to actively promote the development of regional industries in poor areas and employment of poor people. The program requires financial institutions to adhere to the principle of “cost preservation, small profits and sustainable business operations.” The financial institutions must also determine a reasonable interest rate for loans made under the program and reduce financing costs in poor areas. The weighted average interest rate of loans using central bank lending for poverty alleviation should be lower than that of loans using financial institutions’ self-owned funds. By the end of 2020, the outstanding balance of central bank lending for poverty alleviation was RMB 215.3 billion (Table 3.1).10

3.2.1.3

Central Bank Discounts

When the central bank discounts unmatured and discounted commercial bills held by financial institutions, it gives a “central bank discount.” In 1986, the PBOC introduced central bank discounts on a trial basis to solve the problem of payment arrears among enterprises. At the end of 1995, the PBOC began to regard central bank discounts as an integral part of the monetary policy tool system and established a relatively complete 10

China Rural Finance Service Report 2020.

36

3 China’s Financial Inclusion Policy Framework

central bank discounts operating system. In accordance with the needs of financial macro-controls and structural adjustments, the PBOC periodically releases a list of industrial enterprises and products to which it will offer central bank discounts. Since 1998, to diversify the financial system and adjust the credit structure, the PBOC has expanded the recipients object and scope of central bank discounts. It regards central bank discounts as a policy measure to alleviate short-term liquidity shortages faced by some small and medium-sized financial institutions and believes that commercial acceptance bills issued by enterprises with good credit can be dealt with by central bank discounts. Since 2008, the PBOC has further improved the central bank discounts management policy and given fully considered the positive role of a central bank discounts policy in guiding financial institutions to optimize their credit structure. The PBOC supports the release of agriculture-related credit and expands financing for small and medium-sized enterprises. The PBOC clearly requires all branches to give priority to central bank discounts and to give preferential interest rates to agricultural bills held or accepted by small and micro enterprises and to bills issued, accepted, or held by small or medium-sized financial institutions. In addition to the above three commonly used monetary policy tools, namely, required reserve ratios, central bank lending, and central bank discounts, the PBOC also provides commitments to certain financial institutions with long-term and stable sources of funds through tools such as pledged supplemental lending, targeted medium-term lending facility, and guiding them to strengthen support for weak links in society disadvantaged groups and areas.

3.2.1.4

Improvement of the Central Bank Collateral Management Framework

Based on international experience, to guarantee the safety of the central bank’s assets and to prevent moral hazard, the PBOC require financial institutions to provide sufficient qualified collateral when they seek liquidity support. Because small and medium-sized banks hold low amounts of high-grade bonds and have a relative shortage of qualified collateral, the PBOC continued to improve its collateral management system. From 2014 to 2016, the PBOC carried out a pilot project to pledge credit assets and conduct internal ratings, granting internal ratings to some loan enterprises of local legal person financial institutions. The pilot program allowed financial institutions to pledge credit assets whose ratings meet the qualified collateral range acceptable for PBOC to obtain central bank lending. In 2018, the PBOC expanded the types of collateral it would accept for central bank loans to include the following: financial debts no less than AA level for small and micro enterprises, green industry and agriculture, rural areas and farmers; AA+ and AA level corporate credit bonds (including enterprise bonds, corporate bonds, medium-term notes, short-term financing bonds, etc., preferentially accepting bonds related to the green economy of small and micro enterprises), normal inclusive small and micro loans; and private enterprise loans and green loans that are not rated by the central bank.

3.2 Money and Credit Policy

3.2.1.5

37

Loan Support Tools for MSBs

To mitigate the impact of COVID-19 on small and micro businesses (MSBs), in June 2020 and December 2021, the PBOC implemented two policies for local legal person banks: “Instrument Supporting Inclusive MSB Loans” and “Cut Rates Supporting Inclusive MSB Loans”.11 As a result of the pandemic, micro, small, and medium-sized enterprises experienced difficulties in cash flow. To ease the pressure of loan repayment, the PBOC and the China Banking Insurance Regulatory Commission postponed loan repayments to December 31, 2021. As long as the small and micro enterprises maintained stable employment levels, the bank extended the repayment of their loans’ principal and interest and negotiated loan extensions to other enterprises in difficulty. To encourage local legal person banks to extend loans to inclusive small and micro enterprises, the loan extension support tool provided RMB 40 billions of central bank lending funds to provide incentives to local legal person banks to sign interest rate swap agreements with specific purpose vehicles (SPV). The incentives for local legal person banks equaled about 1% of the principal of the loans they deferred. By the end of 2021, the loan extension program had provided RMB 21.7 billion in incentive funds, directly driving local legal person banks to extend RMB 2.17 trillion in small and micro business loans.12 To alleviate the problem of small and micro enterprises’ lack of ability to give mortgage guarantees and to increase the proportion of unsecured loans to small and micro enterprises, the PBOC established the inclusive credit loan support program for small and micro enterprises. The program provides funds to local legal person banks with good operating conditions (financial institutions rated 1–5 by the central bank), which allows the banks to issue unsecured loans to small and micro enterprises. The program, which requires local legal person banks to sign unsecured local support contracts with SPVs, has provided RMB 400 billions of central bank lending funds and has provided funds for 40% of the principal of unsecured loans actually issued by local legal person banks for one year. Small and micro businesses benefiting from the program must pledge to keep employment stable. By the end of 2021, RMB 374 billion had been provided under the credit loan support program, directly driving local legal banks to issue RMB 1.05 trillion in unsecured loans to small and micro enterprises.13 Starting in 2022, the PBOC intends to transform the loan extension support tool for small and micro enterprises into the loan support tool. Financial institutions and enterprises can independently negotiate loan repayment terms in accordance with market principles. Until the end of June 2023, the PBOC will provide funds at the rate of 1% of the increase in the balance of loans to small and micro enterprises of local legal person banks on a quarterly basis and encourage continuous loan 11

Local legal person banks include urban commercial banks, rural commercial banks, rural credit cooperatives, rural cooperative banks, village banks, and private banks (including internet banks). 12 China Monetary Policy Implementation Report, fourth quarter 2021. 13 China monetary Policy Implementation Report, fourth quarter 2021.

38

3 China’s Financial Inclusion Policy Framework

increases. The credit loan support program for inclusive small and micro enterprises will be incorporated into the program of central bank lending for agriculture and small enterprises. The RMB 400 billion central bank lending quota originally used to support the unsecured loans to small and micro enterprises can be used on a rolling basis, and the central bank lending quota can be further increased if necessary. When the qualified local legal person banks issue unsecured loans to small and micro enterprises, they can apply to the PBOC for preferential financial support of central bank lending for small enterprises.

3.2.2 Credit Policy The PBOC guides, controls, and supervises the total amount and direction of credit of financial institutions in accordance with the requirements of national macro-control and industrial policies to promote the adjustment of industrial structure and the coordinated development of regional economies through its credit policy. Inclusive finance has increasingly become the focus of credit policy. The PBOC has issued a number of documents to guide financial institutions in increasing their support for inclusive finance goals. In 2011, the PBOC began to evaluate financial institutions’ implementation of small and micro credit policies related to agriculture. It constantly improved the scoring standards of various indicators, strengthened the comprehensive application of evaluation results, and promoted the effective combination of evaluation results with central bank lending, central bank discounts, market access for interbank lending and quota distribution, and bond market filing. Since 2010, the China Banking Regulatory Commission (CBRC) and the PBOC have implemented an assessment and incentive policy in some regions14 to “encourage a certain proportion of new deposits to be used for local loans” in view of the overall lack of financial services and the long-term existence of capital outflow in rural areas. The target of the assessments is the legal person financial institutions for county deposits, and the main assessment index is the “proportion of annual new local loans in annual new loanable funds.” The county legal person financial institutions with new deposit-loan ratio of more than 70% are deemed to have satisfied the assessment standard. Institutions that meet the standard are rewarded with a reduction in their RRR of 1% point than normal for similar financial institutions. The regulatory authorities give priority to their applications to set up new branches and start new businesses, and local governments implement appropriate incentive policies for them within the scope of laws and regulations.

14

They include all the areas in the 20 provinces (autonomous regions and municipalities) in the central, western, and northeastern regions, as well as designated counties in the national and provincial poverty alleviation and development work areas in the eastern region.

3.3 Fiscal and Taxation Policies

39

To encourage more financial resources to be allocated to key areas and weak links in rural economic and social development, in 2021, the PBOC and the CBRC integrated the assessment of agriculture-related credit policies and the assessment and incentive policies that “encourage a certain proportion of new deposits to be used in local loans” into the “assessment and evaluation of rural revitalization for financial institutions.” They launched a comprehensive evaluation of the effectiveness of banks in serving rural revitalization. They consider the evaluation results when implementing monetary policy tools, market access management, financial regulation ratings, approvals for agency establishment, business scope adjustments, and other macroeconomic regulation and financial supervision functions.

3.3 Fiscal and Taxation Policies Fiscal and taxation policies play an important role in promoting the establishment of sustainable inclusive finance services. Central finance and tax authorities have constantly improved and optimized policies and measures, implemented tax incentives, government awards and subsidies, and improved risk-sharing mechanisms to reduce service costs to increase financial institutions’ support.

3.3.1 Government Subsidies and Incentive Policies 3.3.1.1

Targeted Subsidy Policy for Rural Financial Institutions

Rural banks and other new rural financial institutions often have difficulties such as being established for only a short time and great financial pressure. Since 2008, the central government has provided subsidies of 2% of the average balance of loans to qualified rural banks, loan companies, and rural credit unions. In 2010, subsidies were expanded to include 2,255 bank branches in townships with weak basic financial services in 12 western provinces (autonomous regions). In 2014, the central government refined and improved its policies. It clearly defined the policy periods, adopted the mechanism of sharing subsidy funds between central and local governments,

40

3 China’s Financial Inclusion Policy Framework

implemented strict policy requirements, and highlighted the goal of supporting agriculture and small enterprises.15 By the end of 2014, the central government had allocated RMB 10.345 billion in subsidies to 5,062 rural financial institutions.16

3.3.1.2

Incentive Policy to Encourage More Agriculture-Related Credit

Since 2008, the central government has given rewards of 2% to eligible countylevel financial institutions17 in pilot areas that increase their average balance of agriculture-related loans by more than 15% (adjusted to 13% in 2016). Responsibility for paying the reward funds is shared equally between the central and local governments.18 By 2014, the policy covered 25 provinces (autonomous regions and municipalities), including all major grain-producing areas and most of the central and western regions. Since 2012, the central government has carried out pilot programs in Tianjin, Liaoning, Shandong, and Guizhou, implementing an incremental incentive policy for agriculture-related loans to qualified microfinance companies. By the end of 2014, the central government had allocated RMB 11.534 billion in incentive funds to financial institutions and small loan companies in 17,400 county households in the pilot areas.19

3.3.1.3

Agricultural Insurance Premium Subsidy Policy

To promote the development of agricultural insurance and establish an agricultural risk- sharing and guarantee mechanism, the central government began an agricultural insurance premium subsidy policy in 2007. Farmers and local governments can voluntarily participate in the scheme, which provides premium subsidies designed to encourage farmers to purchase agricultural insurance. The trial program covered five crops in six provinces and autonomous regions. Since then, the central government 15

Rural financial institutions in the east, central, and western regions can enjoy subsidies within 3, 4, and 5 years respectively from the year (inclusive) when the institutions start business. The requirement that “the average balance of agriculture-related loans and loans for small and micro enterprises account for more than 70% of the average balance of all loans in the same year” is added into the subsidy conditions. The subsidy funds are shared in proportion between the central and local governments. In eastern, central, and western regions, the proportion of central and local subsidy share was 7:3, 8:2, and 9:1 respectively (later adjusted to 3:7, 5:5, and 7:3). 16 China Rural Financial Services Report 2014. 17 County-level financial institutions refer to financial institutions and branches of other financial institutions (excluding agricultural development banks) with legal person status at or below the county level within the jurisdiction of a county (including county-level cities, but excluding countylevel districts). County financial institutions with a non-performing loan ratio higher than 3% at the end of the year and a year-on-year increase will not be rewarded. 18 In eastern, central, and western regions, the proportion of central and local financial contribution is 3:7, 5:5, 7:3 respectively. 19 China Rural Financial Services Report 2014.

3.3 Fiscal and Taxation Policies

41

Fig. 3.1 Central government subsidies for agricultural insurance premiums. Source Ministry of Finance (Unit: RMB 100 million)

has gradually increased its support (Fig. 3.1). By 2016, the number of subsidized policies had expanded from 5 in the initial planting industry to 15 in three categories of the planting, breeding, and forest industries,20 which basically cover major agricultural commodities related to the national economy, people’s livelihoods, and food security. Subsidies were extended from the original six provinces and autonomous regions to the whole country. The amount of the subsidies has also gradually increased, and different subsidy policies21 based on the regional insurance situation have been implemented. Central government subsidies increased from RMB 2.133 billion in 2007 to RMB 15.83 billion in 2016.22 In view of the rapid development of local specialty industries and the high demand for insurance, in 2019, 10 provinces benefitted from a pilot program of financial incentives and subsidies to insure local specialty agricultural products, each province could select two local specialty agricultural products for the program. In 2020, the pilot areas were expanded to 20 provinces and each province could select three local 20

The categories now include rice, corn, wheat, cotton, oil crops, potatoes, natural rubber, highland barley, sugar crops, breeding sows, cows, fattening pigs, yaks, Tibetan sheep, and forests. 21 Since 2007, subsidy policies have been gradually adjusted. Starting in 2022, for the insurance premiums for the planting industry, the central government will subsidize 45% for the central and western regions and northeast China and 35% for the eastern region on the basis of the average subsidy of no less than 25% from provincial governments. For forest insurance premiums, the central government will subsidize 50% for public welfare forests and 30% for commercial forests. For insurance premiums for fertile sows, fattening pigs, and dairy cows, the central government will subsidize 50% of the premiums for the central and western regions and 40% for the eastern regions, on the basis of an average subsidy of no less than 25% from provincial governments. The central government will subsidize 40% of the insurance premiums for highland barley, yaks, and Tibetan sheep. 22 China Rural Finance Service Report 2008/2016.

42

3 China’s Financial Inclusion Policy Framework

specialty agricultural products. The central government provides insurance subsidies of 30% in the central, western, and northeast regions and subsidies of 25% in eastern regions, and local government (at and below the provincial level) provide insurance subsidies of at least 35% in local government subsidies. From 2019 to2021, the central government gave awards and subsidies of RMB 577 million, RMB 1.312 billion, and RMB 2.407 billion, respectively.23 A number of local agricultural products, such as Guangdong litchi, Hunan tangerines, Hubei crayfish, Ningxia wolfberry, Inner Mongolia beef, Shaanxi apples, and Tibetan chicken have been supported by awards and subsidies from the central government. In 2022, the policy was extended to the whole country, and the allocation method of awards and subsidies was adjusted. Awards and subsidies are distributed to different regions at different levels based on the results of performance evaluations.

3.3.1.4

Loan Interest Subsidy Policy

(a) Poverty alleviation loans The poverty alleviation loans are an important measure that the government uses to lift residents out of poverty. Since 1998, the central government has arranged subsidies for poverty alleviation loans and has constantly reformed and improved its subsidy system to expand the number of borrowers and enrich the sources of funds. The poverty alleviation loans were initially issued by an agency of the Agricultural Bank of China. The loans support the planting and breeding industries, laborintensive enterprises, agricultural products processing enterprises, and market distribution enterprises, as well as infrastructure construction projects that can increase the standard of living of low-income and poor people. Loans are issued at a preferential rate of 3%, and the central government pays for the discount between the preferential rate and the benchmark rate. After 2008, the poverty alleviation loan management system was comprehensively reformed. Administrative authority devolved from the central government to local governments. The issuing institution was changed from Agricultural Bank to commercial banks that voluntarily compete for the right to issue the loans. Recipients include poor households, enterprises in poor areas, and small and medium-sized infrastructure projects. Interest subsidy was fixed to 5% annual interest for household loans and 3% annual interest for project loans. By 2013, the total amount of interest subsidised loans for poverty alleviation exceeded RMB 90 billion, of which household loans and project loans accounted for 49.7% and 50.3%, respectively.24 (b) Small guaranteed loans and start-up guaranteed loans The small-sum guaranteed loan policy began in 2002. It mainly guides banks to provide small start-up loan support to qualified laid-off workers of state-owned 23 24

China Rural Finance Service Report 2020. Xing (2018).

3.3 Fiscal and Taxation Policies

43

enterprises, registered unemployed people in urban areas, disabled people, and other groups with special employment difficulties through a guarantee fund set up by local governments and loan interest subsidy provided by local governments. Laborintensive small enterprises that hire a certain proportion of the above groups with employment difficulties can also apply. In 2016, the small-sum guaranteed loan policy was changed to start-up guaranteed loan policy. The categories of eligible loan recipients were expanded to include: registered unemployed people in urban areas, people having difficulty finding jobs (including the disabled), demobilized military personnel, people released after serving their prison sentences, college graduates, employees and unemployed people of enterprises that have cut overcapacity, migrant workers returning to their hometowns to start businesses, online businesses, and registered poor people. Women from these groups are included in the focus groups. In 2018, rural farmers who start their own businesses became eligible. In 2020, eligibility was further expanded to include workers in wholesale, retail, accommodations, catering, logistics, transportation, culture, and tourism, as well as online ride-hailing drivers and taxi drivers, who were greatly affected by COVID-19. The maximum start-up guaranteed loan for individuals is RMB 200,000, with a maximum term of three years. The guaranteed loan’s interest is fully subsidized by the government (after 2021, the government provides partial subsidy). The start-up loan granted to enterprises are capped at RMB 3 million, and the maximum duration is two years. The government provides a 50% subsidy for the interest.

3.3.1.5

Special Fund for Developing Inclusive Finance

In 2016, to better guide and drive financial funds to develop inclusive finance programs, the Ministry of Finance integrated several existing programs and established a special fund for inclusive finance development. The fund was used to provide subsidies for qualified rural financial institutions, interest subsidies for start-up guaranteed loans, awards for increasing loans to farmers by county level financial institutions, and awards for public private partnerships (PPP) projects. In 2019, the special fund adjusted to three directions: interest subsidies and awards a for start-up guaranteed loans,25 awards for pilot cities to deepen their fiscal support for the comprehensive reform of private and small and micro businesses’ financial services,26 and targeted subsidies for rural financial institutions. The interest subsidies and awards 25

In addition to the loan discount of 1% of the total amount of start-up guaranteed loans granted in each region in the current year, the special fund rewards the banks with outstanding records of managing start-up guaranteed loan, operating and managing institutions that issue guaranteed funds for start-up guaranteed loans, and other units, so as to subsidize their work expenses. 26 The pilot program ran from 2019 to 2021. Each pilot city in the eastern, central, and western regions received an incentive fund of RMB 30 million, RMB 40 million, and RMB 50 million, respectively, from the central finance department. Pilot cities were encouraged to take the initiative and experiment in light of local conditions, improve financing guarantee capital replenishment and risk compensation mechanisms, and improve financial services for private and small and micro

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for start-up guaranteed loans, as well as targeted subsidies for rural financial institutions, are shared by the central and local governments. The proportion of central government to local government financing in the eastern, central, and western regions was 3:7, 5:5 and 7:3 respectively. From 2016 to 2020, the central government allocated RMB 46.739 billion (including RMB 7.024 billion in 2020) and supported 25,000 financial institutions. The special fund has benefited hundreds of thousands of small and micro businesses and more than 20 million people.27

3.3.1.6

Awards and Subsidies to Financing Guarantee Institutions

Since 2016, China has gradually established a nationwide agricultural credit guarantee system that focuses on agricultural operations. Agricultural credit guarantee companies limit their business to projects in the areas of agriculture, forestry, animal husbandry and fishery production, farmland construction and industrial integration, and development directly related to agricultural production. From 2016 to 2018, the central government provided funds mainly used for capital injections for agricultural credit guarantee companies at all levels. At the same time, because rural guarantee businesses face high risks and lack economies of scale, the central government has provided continuous support. The program subsidizes the guarantee fees to support provincial-level companies in reducing the guarantee rates and agricultural financing costs. Further, business awards and subsidies are provided to support provincial-level companies to improve their risk-compensation capabilities. From 2018 to 2020, the central government allocated RMB 3 billion a year to provide awards and subsidies to provinces with strong policy guidance, such as those that increase the scale of financing guarantee business for small and micro businesses and reduce financing guarantee rates for small and micro businesses.

3.3.2 Tax Policy China’s tax policy encourages financial institutions and organizations to improve inclusive finance services by focusing on farmer households and small and micro enterprises through ways such as tax exemptions, simple tax calculation, income reduction, and pre-tax deduction of reserve funds.

enterprises. The policy was launched in two batches of 119 pilot cities in 2019 and 2020, with an incentive fund of RMB 4.73 billion. 27 China Rural Financial Services Report 2020.

3.3 Fiscal and Taxation Policies

3.3.2.1

45

Preferential Tax Treatment for Banking Loans

The government offers several preferential tax treatments to financial institutions that provide certain inclusive finance services. First, for several financial institutions such as rural credit cooperatives, rural banks, and rural commercial banks at and below the county level, they are subject to a simple tax calculation and a value-added tax (VAT) of 3%, which is less than the typical rate of 6%. Second, the interest income for agriculture-related loans issued by the Agricultural Bank of China the Postal Savings Bank of China are subject to simple tax calculation and a VAT 3%. Third, the interest income on financial institutions’ small loans to farmers28 is exempt from VAT. Fourth, the interest income from financial institutions’ small loans to small and micro enterprises and individual industrial and commercial households29 is exempt also from VAT. Loan contracts signed by financial institutions and small and micro enterprises are exempt from paying the stamp duty. Fifth, the loan loss reserves set aside by financial institutions in accordance with regulatory standards for agriculturerelated loans and loans to small and medium-sized enterprises are deducted when calculating taxable income.

3.3.2.2

Preferential Tax Treatment for Agricultural Insurance Businesses

The tax laws provide several preferential tax treatments for firms in the agricultural insurance business. The first provides agriculture and animal husbandry insurance business exemption from value-added tax. Second, only 90% of the income generated by insurance companies’ sale of planting and breeding insurance is taxable. Third, agricultural animal husbandry and livestock insurance contracts are exempt from the stamp duty.

28

Small loans for peasant households refers to a single loan with a total loan balance of less than RMB 100,000. 29 Small loans mean loans for small enterprises, micro-enterprises, or individual industrial and commercial households with a single-family credit of less than RMB 1 million (including principal). A loan without a credit line refers to a loan for the contracted amount and the loan balance of a single-family loan less than RMB 1 million (including principal). From September 1, 2018, to December 31, 2020, when small and micro-enterprises or individual industrial and commercial businesses with the single-family credit less than RMB 10 million (including the principal), the interest rate was not higher than 150% of the benchmark loan rate of the PBC during the same period, apply for loans, they are exempt from VAT.

46

3.3.2.3

3 China’s Financial Inclusion Policy Framework

Preferential Tax Treatment for Micro-loans Company Loans

China has two preferential tax treatments for small loan companies that provide micro loans. First, interest income on small loan for peasant households30 issued is exempt from value-added tax, and only 90% of the taxable income is included in the company’s total income. Second, the loan loss reserve of 1% of the loan balance at the end of the year is allowed to be deducted from the enterprise income tax.

3.3.2.4

Preferential Tax Treatment for Financing Guarantee and Re-guarantee Businesses

First, Chinese tax law exempts farmers, small enterprises, micro enterprises, and individual industrial and commercial households from VAT by providing financing guarantees and re-guarantees for borrowing and issuing bonds. Second, the amount of taxable income is deducted from the loan loss reserves drawn by qualified financing (credit) guarantee institutions for small and micro enterprises according to regulatory standards.31

3.4 Regulatory Policies To develop inclusive finance, regulators have continued to improve regulatory policies, guide financial institutions to focus on services, innovate products and services, and increase the supply of inclusive finance services. This section will consider some of those regulations.

3.4.1 Exempt Regulatory Fees First, rural credit cooperatives, rural cooperative banks, rural commercial banks, village banks, financing departments of agriculture, rural areas and farmers of the Agricultural Bank of China are exempted from banking supervision fees. Second, companies that offer agricultural insurance, new rural cooperative medical insurance, and small rural personal insurance operated are exempted from insurance business supervision fees. 30

Small loans for peasant households refers to a single loan with the total loan balance of the peasant household less than RMB 100,000 (including the principal amount). 31 With small and medium-sized enterprises as the main service targets, the amount of credit guarantee business and re-guarantee business of small and medium-sized enterprises accounted for more than 70% of the total amount of credit guarantee business in that year; The average annual guarantee rate of the financing guarantee business of small and medium-sized enterprises shall not exceed 50% of the benchmark interest rate of bank loans for the same period.

3.5 Pilot Reform

47

3.4.2 Implement Differentiated Regulation First, the PBOC has increased the tolerance for non-performing loans to small and micro businesses, agriculture, and rural areas. If the non-performing loan rate of ruraltargeted loans, poverty alleviation loans, and loans for small and micro enterprises from commercial banks is no more than 3% higher than its own non-performing loan rate, the non-performing loans cannot be used as a demerit in the regulatory authority’s supervision rating and the bank’s internal evaluation. Second, qualified inclusive finance loans (loans to farmers and small and micro enterprises) are given a lower risk weight to reduce the capital occupation of inclusive finance loans. Third, the PBOC has opened up green channels for financial institutions to create new products related to agriculture and rural areas and set up branches in poorly served areas.

3.4.3 Strengthen Assessment and Supervision Inclusive finance services are included in the regulatory evaluation system, and different monitoring and assessments of the operation of inclusive finance divisions of large and medium-sized commercial banks are conducted. The PBOC focuses on delivery of basic financial services and credit and the service coverage, availability, and satisfaction. Assessment targets for loans to small and micro businesses related to agriculture are set. Regulatory assessment targets are set, such as increasing the speed and number of households for key customers of inclusive finance like small and micro enterprises and farmers. The PBOC also helps financial institutions to improve their internal assessment and incentive mechanisms and improve the credit waiver system, error tolerance, and correction mechanisms.

3.5 Pilot Reform China has vast territory with great geographical differences, and the priorities and difficulties of inclusive finance vary from place to place. To explore various paths and models for the development of inclusive finance, the central government has selected certain regions to carry out pilot reforms, through which it has accumulated replicable and extendable experience that it can use to develop inclusive finance nationwide. Since 2015, inclusive finance reform pilot zones have been successively set up in Jilin Province, Taizhou City in Zhejiang Province, Lankao County in Henan Province, and other places. The feasibility and effectiveness of reform and innovation measures are verified through small-scale pilot programs and then replicated and promoted in

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all areas by drawing upon the experience gained on key points. Different inclusive finance reform pilot zones have different priorities based on local conditions. For example, Lankao County in Henan Province is a traditional agricultural county and is representative of the county economy in China. The construction of Lankao pilot area closely revolves around the three themes of “inclusiveness, poverty alleviation, and county regions.” Taizhou City in Zhejiang Province is located in the eastern coastal areas of developed economy and has developed private economy and numerous small and micro enterprises. The construction of the pilot zone focuses on exploring effective ways for financial services to private economy and the development of small and micro enterprises. Jilin Province is a leading agricultural province in China and one of the main grain-producing areas. The construction of the pilot zone focuses on exploring risk dispersion for modern agricultural large-scale operations, effectively supporting large-scale agricultural operations and supply chain financial services, and optimizing agricultural insurance products. Ningde City and Longyan City in Fujian Province, and Ganzhou City and Ji’an City in Jiangxi Province are all old revolutionary base areas, as well as poor and backward areas. The goal of the construction of the pilot zones in these areas is to alleviate poverty, revitalize the old revolutionary base areas, and accumulate experience in exploring financial support for the joint development of economic civilization and ecological civilization in poor areas. The pilot zone has shown positive results. The “Taizhou model” of financial services for small and micro enterprises (Box 3.1) and the “Lankao experience” of rural financial services have been replicated and promoted in areas where conditions allow.32 Box 3.1 The Taizhou Model of Financial Services for Small and Micro Enterprises Taizhou City is located in the middle of coastal Zhejiang Province and has a developed manufacturing industry as well as numerous small and micro private enterprises. By the end of 2020, Taizhou had 222,000 private enterprises and 466,000 individual businesses, with 1,049 private market entities per 10,000 people. There are 221 financial institutions serving small and micro enterprises in the city. In December 2015, Taizhou was identified as a “pilot zone for financial service reform and innovation of small and micro enterprises.” In the reform and innovation practice, “Taizhou model”,33 characterized by “an enabling government and an effective market,” was formed. Between 2015 and

32

Lankao County was approved as a pilot zone for inclusive finance reform in December 2016. The Lankao Pilot Zone has explored a model of one platform and four systems with digital inclusive finance as the core and an inclusive credit system, credit information system, financial service system, and risk prevention and control system as the basic content. It has better solved the difficulties of farmers’ loan, information collection, and risk prevention and control, and effectively improved the coverage, availability, and provision of financial services in Lankao. It has been promoted in the entire Henan Province. 33 The main content of this column comes from: Wang (2019).

3.5 Pilot Reform

2021, the balance of small and micro business loans and the number of households with small and micro business loans in Taizhou nearly doubled. The ratio of loans to small and micro businesses was about twice the national average. The combined non-performing loan ratio and concern loan ratio dropped to 1.08% from 3.3%, and the corporate loan interest rate dropped to 6.12% from 7.40%.34 I. What Does the Government Do? 1. The government creates a credit information sharing platform for financial services to solve the problem of information asymmetry. It integrates and collects the credit information of market entities such as small and micro enterprises from more than 10 government departments such as market supervision and taxation into the sharing platform and implements automatic collection and real-time updates. The platform is free for banks to use. 2. The government sets up credit guarantee funds for small and micro enterprises to solve the problems of guarantees and credit enhancements. The credit insurance fund is mainly “funded by the government, supplemented by donations from banks,” and is non-profit. The annual guarantee rate is controlled at 0.75% and there are no additional requirements. The fund and the bank share the risk. The scale has expanded from the initial RMB 500 million to RMB 1 billion, and there are more than 20 cooperating banks. 3. The government carries out financing innovations in intangible asset pledges to solve the small and micro enterprises’ problem of insufficient collateral. In 2015, Taizhou became the first pilot area of trademark pledge financing in China. In addition, Taizhou the innovation of financing pledge of intangible assets such as the patent rights and the emission rights are also actively carried out in Taizhou. 4. The government expands channels for proactive debt and asset securitization and solves the problem of funding sources of local legal person financial institutions. On the one hand, it supports corporate financial institutions in carrying out special financial bonds for small and micro enterprises, green financial bonds, inter-bank certificates of deposit, large certificates of deposit, and other active debt business. On the other hand, it actively promotes the development of asset securitization business. Tailong Bank (a city commercial bank in Taizhou) became the first financial institution to register and successfully issue the asset securitization of small and micro enterprises in China.

34

Data source: Taizhou Financial Office.

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II. What Does the Bank Do? 1. The bank adheres to small and micro positioning and sinks service centers. Legal person banks in Taizhou have been adhering to small and micro financial service model on the strategy, mechanism, concept, technology, staff, corporate culture, and other fronts. Eighty percent of their institutions are community branches or small and micro enterprises franchised branches, and 80% of the institutions are located below the township. The average household loan is less than RMB 300,000. 2. The bank insists on lowering the threshold, and serves long-term customers. Legal person banks in Taizhou reduce the reliance on collateral (pledges). If a client who has an intention and ability to work has and has no bad hobby or bad credit record cannot provide the collateral (pledge) or cannot find a qualified guarantor, he/she can be guaranteed by a third party who has a moral relationship with the borrower, such as kinship and love relationship. The pledge focuses on the guarantor’s belief in the borrower’s entrepreneurial attitude and willingness to repay and the guarantor’s daily supervision, rather than the ability of the guarantors to compensate in the event the borrower defaults. The method of “credit + moral guarantee” transforms personal credit into credit value, greatly reducing the requirements for loan qualification and promoting financial inclusiveness. 3. The bank optimizes risk control to achieve business sustainability. Through years of exploration, legal person banks in Taizhou have formed a relational credit risk control model based on soft information collection. In addition, by introducing external big data and establishing customer creditworthiness in other ways, they use fintech to empower and further optimize the risk control. Taizhou Bank and Tailong Bank have maintained a non-performing loan rate of around 1% for years.

References PBC. China Rural Finance Service Report 2008 [R]. China Financial Publishing House, 2009 (in Chinese). PBC. China Rural Finance Service Report 2014 [R]. China Financial Publishing House, 2015 (in Chinese). PBC. China Rural Finance Service Report 2016 [R]. China Financial Publishing House, 2017 (in Chinese). PBC. China Rural Finance Service Report 2020 [R]. China Financial Publishing House, 2021 (in Chinese). Xing Yan. Evolution of Financial Poverty Alleviation Tools in China During the 40 years of Reform and Opening-up [J]. Journal of Sichuan Normal University (Social Sciences Edition), 2018, 45(06):36–44 (in Chinese). Wang Qufei. Understanding of “Taizhou Model” of Small and Micro Finance [J]. China Finance, 2019(20):39–41 (in Chinese).

Chapter 4

Organizational System of Financial Inclusion in China

The financial inclusion service system in China has three features. The first is its multi-level nature: commercial financing, development financing, policy financing, and cooperative financing work together, but within their respective specifications. Dislocation development of national and regional financial institutions and financial markets; The second is diversification: banks, insurance companies, stock companies, micro-credit companies, financing guarantee companies, financial technology companies, other traditional financial institutions, and emerging business patterns are complementary. The third is broad coverage: entities extend their services to the most out-reached populations through multiple channels such as outlets, self-service machines, agents, and internet channels.

4.1 Overview of Multi-level Organization System When financial inclusion practices first began, the main service was micro-credit provided mainly by rural credit cooperatives and certain non-governmental organizations. Under the guidance of financial inclusion policies, with a view toward meeting the development needs of the “three agricultures” (agriculture, rural areas, and farmers) as well as small and micro-sized enterprises, banking financial institutions (other than rural credit cooperatives), insurance companies, financing guarantee companies and other non-banking institutions, micro-credit companies, financial technology companies and other new types of organizations have entered the financial inclusion services field. Different types of institutions have different advantages. They often cooperate with and complement each other with their distinctive offerings and strive to expand the coverage and convenience of services.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_4

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4 Organizational System of Financial Inclusion in China

4.1.1 Banking Institutions Banking institutions are the main providers of financial inclusion services. Development banks, policy banks, and commercial banks provide differentiated credit products and services for the objects of financial inclusion according to their respective responsibilities and positioning.

4.1.2 Insurance Institutions Insurance institutions are an important component of the financial inclusion service system. They provide a variety of insurance products, such as agricultural insurance, life insurance, health insurance, and micro-credit guarantee insurance, for the targets of financial inclusion.

4.1.3 Capital Market Service Institutions Capital market service institutions provide direct financing services such as listing and bond issuance.

4.1.4 Other Financial Organizations Micro-credit companies provide more flexible loan services. Financing guarantee companies provide credit enhancement services for financial entities’ borrowing and bond issuance.

4.1.5 Informal Finance Certain financial inclusion needs cannot be satisfied through the formal financial system. Informal finance, such as private lending and fund mutual-aid cooperatives, can satisfy those needs.

4.2 Banking Institutions

53

Fig. 4.1 Organizational system of inclusive financial inclusion in China

4.1.6 Others With the development of internet technology, many financial technology platforms and companies have taken advantage of the new technologies such as big data and cloud computing to promote financial services, including payment, financing, and insurance, making these services more convenient and extensive (Fig. 4.1).

4.2 Banking Institutions 4.2.1 Small and Medium-Sized Institutions 4.2.1.1

Rural Credit Cooperatives (Including Rural Commercial Banks)

“Rural credit cooperative” is the abbreviated term for “rural credit cooperative union,” which has a nearly 70-year history in China. Although the business model and management system of rural credit cooperatives have undergone many changes, and there is controversy over whether it is actually a “cooperative system,”1 rural credit cooperatives have always been the most important financial service providers in rural areas of China. At the end of 2002, there were 2,453 corporate entities of rural credit cooperatives in China. They had an agricultural loan balance of RMB 557.9 billion, which accounted for 81% of the total agricultural loans issued by financial institutions.2 In view of the persistent problems in the development of rural 1 2

Wang et al. (2013). Data source: China Rural Finance Service Report 2008.

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4 Organizational System of Financial Inclusion in China

credit cooperatives, for example, unclear property rights, heavy historical burdens, poor asset quality, and high potential risks, the central government of China initiated a reform of the property rights system and management system of rural credit cooperatives in June 2003. This reform allowed joint-stock institutions or jointstock cooperative institutions to be established and gave local governments the right to manage them. The goals were to gradually transform rural credit cooperatives into community-based local financial institutions in which farmers, rural industrial, commercial households, and other types of economic organizations could participate and to contribute to the development of farmers, agriculture, and the rural economy by providing relevant financial services. The property rights reform has been implemented for rural credit cooperatives according to local conditions. By the end of 2020, there were 1,539 rural commercial banks, 641 rural credit cooperatives, and 27 rural cooperative banks nationwide (Table 4.1). Rural credit cooperatives in 12 provinces (including municipalities directly under the central government) have all been restructured into rural commercial banks. Rural credit cooperatives (rural commercial banks) are mainly engaged in providing services to the three agricultures and small and micro-sized enterprises and usually do not extend their service reach beyond the county (district) level. The rural credit cooperatives are not allowed to cover different counties (districts); they can only focus on serving the local regions and provide straightforward services to end users. In terms of increased loanable funds each year, the funds are mainly allocated to local applicants and invested in the three agricultures and small and micro-sized enterprises. The investment direction and proportion of large loans are controlled. By the end of 2020, the balance of agriculture-related loans issued by rural credit cooperatives (rural commercial banks) amounted to RMB 11.24 trillion, accounting for 29% of the balance of total agriculture-related loans. The balance of Table 4.1 Profile of practitioners, corporate entities, and business outlets of rural small and medium-sized banking institutions in 2020 Institution type

Number of practitioners

Rural credit cooperatives

165,368

641

14,138

Rural commercial banks

695,430

1,539

60,256

Rural cooperative banks

8,320

27

771

Rural banks

107,879

1,637

4,847

Total

976,997

3844

80,012

Number of corporate entities

Number of business outlets

Note Number of practitioners refers to the number of incumbent employees; number of corporate entities refers to the number of legal persons, excluding the number of unincorporated entities Data source CBIRC, quoted in 2020 China Rural Finance Service Report

4.2 Banking Institutions

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Fig. 4.2 Development status of rural banks in China. Data source China Rural Finance Service Report, unit: number

loans issued to farmers amounted to RMB 6.2 trillion, accounting for 52% of the balance of the total loans issued to farmers.3

4.2.1.2

Rural Banks

Rural banks refer to banking financial institutions approved by the financial supervision authorities and set up in at the county or below level. These banks mainly provide services to the three agricultures and small and micro-sized enterprises. To solve the problems of insufficient network coverage and financial supply and lack of competition between banking financial institutions in rural areas, all kinds of capitals were encouraged to set up rural banks to provide financial services to local farmers in rural areas and aid the economic development of agriculture and rural areas (Fig. 4.2). Rural banks are conceived and set up by banking financial institutions in China, which attract investments from domestic non-financial corporate entities and domestic natural persons. Rural banks have the following features. First, they have low requirements for market access. For a rural bank at the county (municipality) level, the minimum registered capital required is RMB 3 million. For a rural bank established at the township level, the minimum registered capital required is RMB 1 million. In contrast, the minimum registered capital required to establish rural commercial banks and urban commercial banks is RMB 50 million and RMB 100 million, respectively. Second, rural banks have specific equity structure requirements. The largest shareholder or the sole shareholder of a rural bank is required to be a banking financial institution. Its shareholding ratio must not be less than 20% of the total share capital of the rural 3

China Rural Finance Service Report 2020.

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4 Organizational System of Financial Inclusion in China

bank (adjusted to 15% in 2012). The shareholding ratio of individual natural person shareholders and their affiliated parties in a rural bank must not exceed 10% of the total share capital of the rural bank. The shareholding ratio of a single non-banking financial institution or a single non-financial corporate entity and its affiliated parties in a rural bank must not exceed 10% of the total share capital of the rural bank. Third, where rural banks can operate is restricted. In principle, a rural bank can only operate in the county (cities, district) where it is registered. To trade off the coverage of financial services and the commercial sustainability of institutions, the “multi-county, one bank” policy was initiated and implemented in 2018. According to the policy, one rural bank can be set up in one county out of multiple adjacent counties (cities, district) of a certain province. However, branches of the rural bank can be established in the adjacent counties (cities, district) for the central and western regions and the less developed borders and poverty-stricken areas, where the total economic output is low, the population is small, and the foundation for sustainable development of rural banks is weak. Fourth, rural banks are allowed to establish differentiated corporate governance structures according to their respective organizational forms, development strategies, asset scales, business complexity, and community banking characteristics. In March 2007, the first rural bank was founded in Sichuan. In December 2007, HSBC Rural Bank, the first rural bank initiated and set up by a foreign bank, was founded in Hubei.4 By the end of 2020, 1,637 rural banks had been founded, covering 70% of the counties across China. Among others, 1,089 rural banks were founded in the central and western regions, accounting for 66% of all rural banks. Ninety percent of the loans issued by rural banks were allocated to farmer households and small and micro-sized enterprises in the county-level regions (Box 4.1). Box 4.1 BOC Fullerton Community Bank5 BOC Fullerton Community Bank is the rural bank group that has the largest number of branches in China. In 2011, Bank of China initiated cooperation with Fullerton Financial Holdings of Temasek, Singapore to set up rural banks in large numbers across China. BOC Fullerton established corporate institutions in a batch-based and standardized manner to achieve a scale economics effect and to further reduce unit management costs, technological systems costs, and product R&D costs. Meanwhile, based on the implementation of centralized control and management, BOC Fullerton also promotes intensification in the

4

By the end of 2016, five foreign-funded banks had set up 33 rural bank branches in China, covering ten provinces and cities including Beijing, Henan, Hubei, and Chongqing. Source: China Rural Finance Service Report 2016. 5 Data source: BOC Fullerton website.

4.2 Banking Institutions

57

policy framework, product R&D, and system platforms, which not only reduces unit operating costs, but also effectively controls operational risks and enhances synergy. Currently, BOC Fullerton Community Bank has 126 corporate institutions, mainly in the central and western regions where financial services are urgently needed. With more than 190 branches and outlets in rural areas, BOC Fullerton Community Bank has successfully established a financial service network covering villages and counties in 22 provinces (cities) across China. BOC Fullerton adheres to the strategic orientation of “taking root in the counties to support agriculture and small businesses,” and focuses on providing services to small and micro-sized enterprises and the three agriculture clients. BOC Fullerton only deals in the basic services of deposits, lending, and foreign exchange, and has launched innovative agricultural products in 16 categories and more than 70 subcategories for small and micro-sized enterprises and the three-agricultures customers. The bank considers the general lack of qualified collateral of those customers and the relative lack of credit information and accepts housing, sheds, pigsties, and henhouses on rural collectively owned land as “quasi-collateral.” In addition, it also extends flexible repayment methods, convenient annual review processes and differentiated pricing to the three-agricultures clients. BOC Fullerton draws lessons from the micro-credit technologies of advanced peers in the international industry to design specialized credit processes, which encompasses paperless review and approval with the help of science and technology systems. By the end of 2021, BOC Fullerton Community Bank had more than 3.8 million deposit clients and 450,000 loan clients with an average loan amount of about RMB 160,000. Loans issued to agricultural clients and small and micro-sized enterprises account for more than 90% of total loans. Since its establishment, BOC Fullerton Community Bank has issued loans cumulatively amounting to about RMB 250 billion, providing loan services to more than 700,000 customers.

4.2.2 Large-Scale Banking Institutions 4.2.2.1

Policy Banks

Both the China Development Bank and the Agricultural Development Bank of China, which were established in 1994, are policy banks. The China Development Bank serves the national economy’s medium- and long-term major development strategies mainly through financial services such as medium- and long-term credit and investment. In 2015, the national government defined the China Development Bank’s

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4 Organizational System of Financial Inclusion in China

purpose as being a development-oriented financial institution that will develop businesses, such as urbanization, affordable housing projects, and so on. In the field of financial inclusion, the China Development Bank focuses on its medium- and longterm investment and financing advantages to support the development of leading enterprises for rural infrastructure construction, rural housing construction, and agricultural industrialization. In 2004, its state-subsidized student loan business was launched. By the end of 2020, the China Development Bank had issued student loans totalling RMB 229.2 billion, covering 27 provinces (cities), and 2,384 counties (districts), and supported 14.76 million students from families with financial difficulties.6 By the end of 2021, the China Development Bank had a total asset of RMB 17.167941 trillion, and it had become the largest development financial institution in the world. The main task of the Agricultural Development Bank of China is to support agricultural development and rural construction. The initial business of the Agricultural Development Bank of China was mainly to issue loans for the procurement of grain, cotton, and oils, which gradually expanded to providing medium- and longterm credit support for agricultural industrialization and the constructing agricultural and rural infrastructures. Since 2014, the business of the Agricultural Development Bank of China has further expanded to include a new focus on the issues of the three agricultures and poverty-stricken areas. By the end of 2021, the total assets of the Agricultural Development Bank of China was RMB 7.983341 trillion. In 2021, the balance of inclusive small and micro loans issued by the Agricultural Development Bank of China was RMB 25.398 billion, which had increased RMB 6.174 billion from the beginning of the year (a 32.12% increase). At the end of 2021, there were 8,194 loan accounts with a balance, representing an increase of 1,628 accounts from the beginning of the year. In 2021, the average interest rate of agricultural small and micro loans issued by the provincial branches was 3.50%. In 2016, the China Development Bank and the Agricultural Development Bank of China set up their respective poverty alleviation financial departments, which have special management and separate accounting from the rest of the bank. The China Development Bank mainly focuses on supporting education and health care and on constructing infrastructure, including transportation, water conservancy, electric power, renovation of dilapidated houses in rural areas, and governance of human settlements, in poverty-stricken areas. The Agricultural Development Bank of China is committed to supporting the acquisition and storage of grain, cotton, and oils, the industrialization of the agriculture industry, and the development of characteristic industries in poverty-stricken areas. From 2016 to 2020, the China Development Bank issued RMB 1.18 trillion in poverty alleviation loans, and the Agricultural Development Bank of China issued RMB 2.32 trillion in poverty alleviation loans.7

6

Data source: the website of China Development Bank. Sources: The China Development Bank, 11 2020 annual report of Agricultural Development Bank of China.

7

4.2 Banking Institutions

59

Fig. 4.3 Development of county-level financial business of the Agricultural Bank of China. Data source China Rural Finance Service Report over the years; unit: RMB 100 million

4.2.2.2

Commercial Banks

(a) Agricultural Bank of China The Agricultural Bank of China was established in 1955; it mainly serves the development needs of agriculture and rural areas. Since the late 1970s, the Agricultural Bank of China has evolved from a national specialized bank, to a wholly state-owned commercial bank, to a state-controlled commercial bank. In January 2009, it was restructured into a limited liability company. In July 2010, it was listed on both the Shanghai Stock Exchange and the Stock Exchange of Hong Kong. The Agricultural Bank of China is one of the major providers of comprehensive financial services in China: in 2021, it ranked third in terms of Tier 1 capital on the list of the Global Top 1000 banks by Banker magazine (Fig. 4.3). The Agricultural Bank of China’s mission is to explore what models are effective for large commercial banks to serve the three agricultures and integrate those methods into business operations. Toward that end, in 2008, the Agricultural Bank of China started to implement reforms across its Financial Department for Agriculture, Rural Areas, and Farmers. It implemented the operating mechanism of “six separations” for county branches, namely, separate capital management, separate credit management, separate accounting, separate risk provision and write-off, separate capital balance, and separate performance appraisal, and provided supporting policies for fiscal and tax concessions, differentiated deposit reserve ratios and reduction and exemption of supervision fees.8 By 2015, all the county-level branches of the Agricultural 8

Since 2011, the PBC has assessed the county business departments of the Agricultural Bank of China and implemented a preferential deposit reserve ratio of 2% lower than that of the Agricultural Bank of China for the county business departments that pass the assessment. The interest income from loans granted by the county business department to farmers, rural enterprises, and various

60

4 Organizational System of Financial Inclusion in China

Bank of China were integrated into the management of the Financial Department for Agriculture, Rural Areas and Farmers. Relying on the financial department for the three agricultures, the Agricultural Bank of China separately arranges the credit plans, economic capital, financial expenses, fixed assets indicators, personnel wages, among other things, for the three agriculture businesses and county-level businesses, allocates strategic resources to key areas, and gives higher priority to serving the needs of the three agricultures. By the end of 2020, the Agricultural Bank of China had established 12,545 county-level outlets, covering all counties across China. (b) Postal Savings Bank of China Relying on the postal savings network all over rural areas, postal savings banks have become a major institutional force in the rural deposit market, second only to rural credit cooperatives. Because postal savings banks provide deposit services but no loan services, they have become one of the major channels for outflows of rural capital. In 2007, the national government of China reformed the management system of postal savings banks, which led to the China Postal Group setting up the Postal Savings Bank of China with full capital to explore effective forms of services for rural areas with the guiding principle of commercialization. In 2012, the Postal Savings Bank of China was restructured into a joint stock limited company and was listed on the Stock Exchange of Hong Kong and the Shanghai Stock Exchange in September 2016 and December 2019, respectively. The Postal Savings Bank of China is positioned to serve the three agricultures, urban and rural residents, and small and medium-sized enterprises, with nearly 40,000 business outlets. Adhering to the orientation of “supporting agriculture and small businesses”, the Postal Savings Bank of China is committed to issuing small loans and loans for small and micro-sized enterprise in rural areas. The small loan business was piloted in 2007, and by the end of 2012, RMB 651.888 billion of small loans had been issued, with an average amount of RMB 51,700; 71% of the small loans were released to rural areas at and below the county level. Cumulatively, loans issued to small enterprises amounted to RMB 677.088 billion, with an average amount of RMB 361,500.9 In 2016, the Postal Savings Bank of China launched the pilot project of the Financial Department for Agriculture, Rural Areas, and Farmers to strengthen services for agricultural industrialization, construction of agricultural and rural infrastructures, new rural construction and other fields. By 2020, the Financial Department for Agriculture, Rural Areas, and Farmers of the Postal Savings Bank of China had formed the operating mechanism of “three divisions and six centres.”10 The Postal Savings Bank of China set up special credit lines for loans related to agriculture and poverty alleviation and gave priority to ensuring the development of rural organizations was subject to business tax at a reduced rate of 3% before the business tax was replaced with a value-added tax at a reduced rate of 3%. Business supervision fees and institution supervision fees were waived according to the standards specified by Rural Credit Cooperative. 9 Data source: China Rural Finance Service Report 2012. 10 The headquarters of the “Three-Agricultures Financial Business Department” has a policy and innovation division, a business development division, and a business management division. The three-agricultures risk management center, the three-agricultures asset liability management center,

4.2 Banking Institutions

61

the financial business for the three agricultures. By the end of 2020, the balance of agricultural loans issued by the Postal Savings Bank of China was RMB 1.41 trillion and that of loans issued to farmers is RMB 1.08 trillion (Table 4.2). (c) Other banks To further make up for the shortage of financial services and increase the supply of inclusive financial services, since 2017, the regulatory authorities of China have encouraged large and medium-sized commercial banks to establish inclusive financial services departments to improve the specialized service system for financial inclusion and enhance its capacity. The financial inclusion service departments mainly feature a streamlined (vertical) management system and the “five-specialty” management mechanism. The streamlined management system requires relevant banks to set up their financial inclusion vertical management systems from the head office to the branches. The head offices set up the financial inclusion business divisions from top to bottom, and the branches scientifically and set up the front-end business departments and specialized operating institutions for the financial inclusion divisions by breaking down the different business aspects and delegating approval authority so as to better serve the intended clients. According business sustainability principles, the financial inclusion division must utilize the “five-specialty” operating mechanism. The first step requires the division to establish a specialized comprehensive service mechanism to expand the breadth and depth of financial inclusion services, develop diversified financial services, formulate specialized credit management policies, and establish a special credit evaluation mechanism. The second step requires the division to establish a specialized statistical accounting mechanism to truly reflect the costs, revenues, and risks of the financial inclusion division. The third step requires the division to establish a specialized risk management mechanism to fully accrue reserves to cover the risk of asset impairment, determine reasonable risk tolerance for financial inclusion services, and implement the exemption system of credit-granting due diligence. The fourth step requires the division to establish a specialized resource allocation mechanism to specifically release resource plans for credit, economic capital, costs, fixed assets, employment, etc., to provide a strong resource guarantee for financial inclusion services. The fifth step is to establish a specialized assessment and evaluation mechanism, gradually establish a special performance evaluation system in line with the characteristics of the financial inclusion business, improve the differentiated evaluation index system, and build effective mechanisms for performance remuneration management and incentives and restraint. By the end of 2020, all five large-scale commercial banks in China11 had established their financial inclusion divisions. All 12 joint-stock banks had set up their the three-agricultures financial management center, the three-agricultures human resource management center, the three-agricultures company business center, and the three-agricultures credit management center have corresponding functions. 11 The five major banks are the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, the China Construction Bank, and the Bank of Communications.

7651.35

China Development Bank

2013

8821.68

24,658.22

3881.55

21,361.36

Data source China Rural Finance Service Report 2018, 2020

– 21,462.77

Postal Savings Bank of China

Agricultural Development Bank of China

2012 19,144.05

Name of institution

Agricultural Bank of China

9976.95

27,424.30

5902.21

23,809.60

2014

11,045.68

33,884.75

7478.92

25,818.84

2015

12,572.19

40,143.39

9112.11

27,515.92

2016

15,566.73

45,427.85

10,542.08

30,762.19

2017

16,902.43

48,343.35

12,007.03

33,671.05

2018

Table 4.2 Balances of agricultural loans issued by large-scale agricultural financial institutions from 2012 to 2020. Unit: RMB 100 million 2020 1.41 trillion

4.29 trillion

62 4 Organizational System of Financial Inclusion in China

4.3 Insurance Institutions

63

financial inclusion divisions or business divisions specializing in financial inclusion. Of the 133 urban commercial banks across China, 45 have set up financial inclusion divisions to focus on the service areas in relation to small and micro-sized enterprises, the three agricultures, entrepreneurial and innovative groups, and poverty alleviation; four have set up financial divisions to focus on financial services for the three agricultures.

4.3 Insurance Institutions By the end of 2021, there were 235 insurance institutions in China. Among them, there were 13 insurance groups/holding companies, 88 property insurance companies, 91 life insurance companies, 17 reinsurance companies, 33 insurance asset management companies, and three fraternal benefit societies.12 Since 2007, when agriculture insurance policies were first issued, the field has continued to grow and improve in response to encouragement by government policies. By the end of 2018, 33 insurance institutions, including comprehensive insurance companies, specialized agricultural insurance companies, mutual insurance companies, and agricultural mutual aiding and cooperative insurance organizations, were engaged in the agricultural insurance business. At least three businesses related to agriculture insurance have been established in nearly every province, which formed a moderately competitive market system. The insurance industry has been actively expanding the insurance market at the county level by providing micro-life insurance and micro-credit guarantee insurance, constantly extending insurance services to remote areas, expanding services to low-income groups, and broadening the coverage of insurance. Insurance institutions are speeding up the construction of agricultural service outlets. For example, the People’s Insurance Company of China has set up insurance departments for insurance for the three agricultures at the levels of the head office, province, prefecture/city, and county, rural marketing service departments in central villages and towns, and village-level insurance service outlets for the three agricultures in qualified administrative villages to extend village-level service coverage. A three-level rural insurance network of county branch companies, township marketing service departments or township agents, and village onsite salespeople (village workshops) has been formed in rural areas, which has extended insurance services to the doorsteps of rural households. By the end of 2018, the coverage rate of rural insurance service outlets reached 95% at the township level and exceeded 50% at the village level.13 Since the implementation of the poverty-alleviation strategy, insurance institutions have increased their input of resources in poverty-stricken areas. From 2015 to 2019, the amount of agricultural insurance for poverty alleviation increased from RMB

12 13

Sources: The Insurance Association of China, IAC, http://www.iachina.cn/. China Rural Finance Service Report 2018.

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4 Organizational System of Financial Inclusion in China

1.863 billion to RMB 1.13 trillion. The number of poverty-level households insured increased from 405,700 in 2015 to 4,432,800 million in 2019.14

4.4 Capital Market China’s capital market, represented by the stock exchanges established in Shanghai and Shenzhen, was founded in the early 1990s. Thirty years later, a multi-level capital market system has been established in China, which is composed of the main board markets in Shanghai and Shenzhen, the Science and Technology Innovation Board (STAR Market), the Growth Enterprise Market (GEM), the Beijing Stock Exchange, the National Equities Exchange and Quotations (NEEQ), and the regional equity transaction markets.

4.4.1 Securities Exchange Market 4.4.1.1

Shanghai Stock Exchange

Opened in December 1990, the Shanghai Stock Exchange now has four major types of securities trading: stocks, bonds, funds, and derivatives, based on a relatively complete market structure. In June 2019, the Shanghai Stock Exchange set up the STAR Market and experimented with a registration-based IPO system. The STAR Market is positioned as a frontier market oriented to cutting-edge technologies and major national requirements, whose service are innovative high-tech enterprises featuring compliance with national strategies, capacity in breaking through core technologies and high market recognition, with a view to accelerating the transformation of scientific and technological achievements into practical productive forces. By the end of 2021, there were 2,037 companies listed on the Shanghai Stock Exchange, with a total market capitalization of RMB 51 trillion. Among them, 372 companies were listed on the STAR Market, with a market capitalization of RMB 5.5 trillion; 24,058 bonds were listed in the bond market, with a face value of RMB 15.3 trillion.

4.4.1.2

Shenzhen Stock Exchange

The Shenzhen Stock Exchange opened in December 1990. In October 2009, the Shenzhen Stock Exchange set up the Growth Enterprise Market (GEM). The main board market of the Shenzhen Stock Exchange is oriented to supporting relatively well-developed enterprises in terms of financing development and enterprise strength growth; GEM mainly serves start-up enterprises with high growth potential. Since 14

Insurance Association of China.

4.4 Capital Market

65

the profits of enterprises in the main board market are generally higher, the price fluctuation ratio for stock transactions is limited to 10%, without thresholds for investor qualification. GEM is mainly composed of enterprises featuring relatively rapid growth, and the conditions for stock issuance and listing in GEM are more lenient: the investor qualification threshold is RMB 100,000, and the price fluctuation ratio for stock transactions is 20%. By the end of 2021, there were 2,578 companies listed on the Shenzhen Stock Exchange, with a total market capitalization of about RMB 40 trillion; 9,853 bonds were listed with a face value of RMB 2.9 trillion (Box 4.2). Box 4.2 Establishment of the STAR Market to Facilitate Financing of Innovative Enterprises Scientific and technological innovation is commonly characterized by fast updates, slow development, and high risk, which often requires the support of venture capitalists and capital markets. In June 2019, the Shanghai Stock Exchange set up the STAR Market to encourage high-quality scientific and technological enterprises at all development stages to go public. The STAR Market has the following features. 1. “Inclusive and pluralistic” listing conditions. The STAR Market has formulated five listing standards, which comprehensively consider the expected market value, income, net profit, R&D investment, and cash flow. The STAR Market pays more attention to the scientific and technological innovation capability of enterprises, thus allowing enterprises that comply with the positioning of the STAR Market, have not yet made a profit, or have accumulated uncompensated losses to be listed. The STAR Market allows enterprises with high growth potential to obtain financing in the start-up and growth period to enhance the company’s strength and scientific and technological innovation ability. 2. A registration-based IPO system. Drawing on lessons from relevant practices of well-developed overseas markets, the STAR Market has optimized and simplified the registration conditions towards baseline and principal requirements. It also has disclosed its auditing standards and auditing procedures, as well as inquiries and responses. The registrationbased IPO system prioritizes information disclosure and allows investors to make value judgments. The price, scale, and pace of stock issuance are mainly determined through the market mechanisms of inquiry, pricing, and placement by issuers, sponsors, underwriters, institutional investors, and other market participants based on market-oriented means, without any administrative restrictions imposed by regulatory authorities. 3. Higher investor qualifications. Compared with other markets, the STAR Market is more complicated and features high market risks. Thus higher requirements are exposed to the investors in terms of risk identification

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4 Organizational System of Financial Inclusion in China

ability and risk tolerance. In view of the characteristics of innovative enterprises, the investor qualification management system is implemented in terms of assets, investment experience, risk tolerance, and other aspects. When an individual investor applies for the authority to trade stocks in the STAR Market, the applicant is required to have a minimum of 24 months’ stock trading experience. The investor must also have a minimum daily average value in his or her securities account and capital account over the first 20 days of RMB 500,000. Individual investors who have not yet met these requirements can indirectly participate in the STAR Market by purchasing shares of publicly offered funds. 4. A more market-oriented trading system. Based on the characteristics of the companies listed in the STAR Market and the investor qualification requirements, the START Market has a more market-oriented trading system. For example, there is no limit on the price fluctuation of a new share within the first five trading days after its listing; the limit will be set at 20% after the first five trading days. On the basis of competitive price transactions, the market-maker system will be introduced when conditions allow. By the end of 2021, there were 372 companies listed in the STAR Market, with a market capitalization of RMB 5.5 trillion. The listed companies of the STAR Market are mainly in strategic emerging industries and high-tech industries such as integrated circuits, biomedicine, new energy, etc. In 2021, the listed companies of the STAR Market provided more than 7,800 invention patents, with an average of 108 invention patents per company.

4.4.1.3

National Equities Exchange and Quotations (NEEQ)

The National Equities Exchange and Quotations (NEEQ), the third national securities exchange, started operating in January 2013. NEEQ mainly exists for small and medium-sized enterprises that have a high potential for innovation, entrepreneurship, and growth. Any qualified joint-stock company can apply for listing, publicly transfer shares, and carry out equity financing, debt financing, asset restructuring, and other transactions through sponsoring securities dealers. There are several main differences between NEEQ and the stock exchanges. First, their service targets are different. NEEQ mainly serves small, medium- and micro-sized enterprises that have a high potential for innovation, entrepreneurship, and growth. Such enterprises are generally small and have not yet formed a stable profit model. There is no financial threshold for access. Any joint-stock company can apply for listing with NEEQ if recommended by a sponsoring securities dealer, even if the company has not yet turned a profit, provided that its shareholding structure is clear, its operation is legal and standardized, its

4.4 Capital Market

67

corporate governance is sound, its business is concrete, and it has fulfilled its information disclosure obligation. Second, their investor groups are different. NEEQ has strict qualifications for investors, and it is tilted toward institutional investors. Third, NEEQ acts as a go-between small, medium- and micro-sized enterprises and industrial capital; its primary role is to support enterprise development and capital investment and withdrawal, rather than to facilitate trading. Because NEEQ’s access conditions are more accessible, its listed companies are significantly varied in terms of their development, business scale, and profitability, and they are different in terms of industry characteristics, enterprise management, and development potential. Differentiated institutional arrangements are made in terms of transaction system, issuing system, information disclosure requirements, in favor of the precise interfacing of investment and financing and the implementation of hierarchical management. Depending on certain standards regarding, NEEQ listed companies could be placed in one of two management layers: the foundation layer or the innovation layer. By the end of September 2019, 13,219 enterprises had been listed on NEEQ. Small and medium-sized enterprises account for 94% and private enterprises account for 93% of those listed, and 6,388 listed companies issued 10,516 shares and raised RMB 491.139 billion. To improve the capacity of the capital market to serve small and medium-sized enterprises and the private economy, the CSRC comprehensively reformed NEEQ in October 2019. The first broad reform was to optimize the issuing and financing system, by building a diversified issuing mechanism according to the needs of listed companies at different stages of development, improving the original directional issuing system, and allowing qualified enterprises at the innovation layer to publicly issue shares to unspecified qualified investors. The second reform was to improve market stratification by setting up market classification (Innovation layer and Base layer) and forming a differentiated system to integrate transactions, investor qualification, information disclosure, supervision, and management, and introducing longterm funds such as publicly offered funds. The third reform was to establish a transfer market listing mechanism for listed companies so that a listed company can be transferred and listed in another market, provided that the listed company was established on market classification for a certain period of time and meets the listing conditions and relevant regulations of the corresponding stock exchange. The fourth set of reforms aimed to strengthen supervision and management, implement classified regulation, research to intensify illegal costs, and improve the quality of listed companies. The fifth reform was to improve the market withdrawal mechanism, improve the delisting system, promote market clearing, promote the formation of a sound market admission and withdrawal ecology, and effectively protect the legitimate rights and interests of investors. On July 27, 2020, market classification was officially established and opened for trading. By the end of 2020, there were 8,187 companies listed on NEEQ with a total market capitalization of RMB 2.65 trillion; small and medium-sized enterprises accounted for 94% of the companies.

68

4.4.1.4

4 Organizational System of Financial Inclusion in China

Beijing Stock Exchange

To better support the innovation and development of small and medium-sized enterprises, the Beijing Stock Exchange was established on the basis of market classification of NEEQ in September 2021. With the application of various basic systems of market classification on an overall basis, and the synchronous pilot run of the registration-based IPO system. The Beijing Stock Exchange has several features that are different from the Shanghai Stock Exchange and the Shenzhen Stock Exchange. First, the Beijing Stock Exchange focuses on serving innovative small and mediumsized enterprises. Second, in terms of institutional arrangements, the Beijing Stock Exchange has a system that is suitable for small and medium-sized enterprises and draws lessons from the market rotating mechanism of the Shanghai Stock Exchange and the Shenzhen Stock Exchange. Third, qualified investors are highlighted, and the investor structure is different from the other stock exchanges. The Beijing Stock Exchange has several development goals. The first is to build a set of fundamental institutional arrangements that conform to the characteristics of innovative small and medium-sized enterprises and cover listing, trading, delisting, continuous supervision, and investor qualification management to enhance the ability of the multiple-level capital markets to develop financial inclusion. The second is to promote its linkage role in the multi-level capital market and form a mutually complementary and mutually reinforcing growth channel of direct financing for small and medium-sized enterprises. The third is to cultivate a number of outstanding innovative small and medium-sized enterprises. By the end of 2021, there were 82 companies listed on the Beijing Stock Exchange, with a total market capitalization of RMB 272.3 billion.

4.4.1.5

Regional Equity Markets

Regional equity markets are a type of emerging market that has been developed in the past decade. They provide venues and facilities for the issuance and transfer of nonpublic offering securities, which is a private equity market supporting small, mediumand micro-sized enterprises in the provincial administrative regions. Regional equity markets are governed by the local government at the provincial level in accordance with relevant regulations that assume the corresponding responsibility for risk mitigation. By the end of 2021, there were 35 regional equity market operating institutions across China, which were formed on the basis of a “one province, one market” system (Fig. 4.4). Each regional equity market acts as the hub for local capital operations, explores financial support paths to serve small, medium- and micro-sized enterprises, and promotes the agglomeration of resource elements of the financial innovation system by setting up characteristic board markets such as the scientific and technological innovation board market, the talent board market, and the rural revitalization board market. Through cooperation with various financial institutions and market intermediaries, the regional equity market now offers diversified financing instruments in

4.4 Capital Market

69

Fig. 4.4 Multi-level capital market in China

relation to equity, creditor’s rights, and credit to small, medium- and micro-sized enterprises. By the end of 2021, regional equity market loaned RMB 1.666463 trillion for various types of financing, including RMB 367.439 billion for equity financing, RMB 442.031 billion for bond financing, RMB 595.18 billion for equity pledge financing, and RMB 258.907 billion for other financing.15 By the end of 2021, 186,800 small, medium- and micro-sized enterprises were supported in the regional equity market.16 Among them, 97 companies were transferred and listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, 738 companies were transferred and listed on NEEQ, and 64 companies were acquired by listed companies and other companies listed on NEEQ.

4.4.2 Bond Market The bond market in China is the second largest in the world and includes the overthe-counter market and the floor trading market. The inter-bank bond market is not only the largest over-the-counter market for bond transactions but also the main body of China’s bond market; commercial banks and other financial institutions are 15

Data source: Financial News—www.financialnews.com.cn, “Nearly 40,000 Listed Companies— the Regional Equity Market Embarks on the Road of Steady Development,” 2022-02-10. 16 Data source: Wang and Chen (2022).

70

4 Organizational System of Financial Inclusion in China

the main participants. As a block trading market, the inter-bank bond market has a bilateral negotiation transaction model for settlement on a case-by-case basis. The exchange market is the floor trading market of bond transactions, which combines both wholesale and retail for market participants composed of institutional investors and individual investors. The market is characterized by collective matchmaking trading for retail, and it adopts net settlement. The fundamental products in China’s bond market include government bonds, financial bonds, corporate credit bonds, and asset-backed securities. The bond market takes several approaches to serving financial inclusion. The first is to broaden the direct financing channels of small, medium- and micro-sized enterprises through product innovation. For example, the inter-bank bond market has launched a series of products that specifically meet the financing needs of small, medium- and micro-sized enterprises, including, for example, “mass entrepreneurship and innovation” special debt financing instruments, venture capital enterprise debt financing instruments, and asset-backed notes. The second is to assist commercial banks in issuing special financial bonds and raising special funds for financial inclusion areas, such as special bonds for the three agricultures and loans for small and micro-sized enterprises. It also includes the assistance to commercial banks in issuing securities backed by loans of micro-sized enterprises and invigorate the sources of financial inclusion funds.

4.4.3 Futures Market The price discovery and risk dispersion function of the futures market can help the participants in the agricultural industry chain enhance their risk management ability and prevent their production and income generation from being adversely impacted by natural disasters and market fluctuations. Financial services, including insurance and credit are coordinated with the futures market to provide more comprehensive solutions for financial inclusion services. By the end of 2020, 28 agricultural futures and six agricultural options had been publicly offered, covering grain, cotton, oil, sugar, groceries, forestry, and other major agricultural products.17

4.4.4 Capital Market Service Institutions By the end of 2021, there were 140 securities companies China, including 17 securities companies that involved foreign investors. The total assets of the securities companies were RMB 10.59 trillion.18 By the end of December 2022, there were 137 fund management companies in China, including 44 joint ventures. By the end of 2021, there were five futures 17 18

China Rural Finance Service Report 2020. China Securities Industry Development Report 2022.

4.5 Other Financial Organizations

71

Fig. 4.5 Number of loans and balances of micro-credit companies in China. Data source The People’s Bank of China

exchanges and 150 futures companies in China. In 2021, there were 7.514 billion transactions in China’s futures market, with a total transaction value of RMB 581.2 trillion.19

4.5 Other Financial Organizations 4.5.1 Micro-credit Companies To direct the flow of funds to rural and underdeveloped areas and improve the financial services in rural areas, regulatory authorities began to launch pilot projects in 2005 with a view toward exploring the development of micro-credit organizations tailored to the needs of farmers and rural development and initiated by natural persons or enterprises. The first micro-credit companies were set up in the provinces of Shanxi, Inner Mongolia, Sichuan, Shaanxi, and Guizhou. In 2008, the pilot was expanded to the whole country, and micro-credit companies developed rapidly, reaching their peak in 2015 (Fig. 4.5). Micro-credit companies are limited liability companies or joint-stock limited companies founded by natural persons, business entities, and other social organizations that deal in the micro-credit business, without involvement in public deposit. The people’s governments at the provincial level are responsible for the examination 19

Sources: Asset Management Association of China, https://www.amac.org.cn/.

72

4 Organizational System of Financial Inclusion in China

and approval, supervision, and risk mitigation of micro-credit companies under its jurisdiction. In principle, micro-credit companies conduct business within the administrative area at the county level where the company is located. However, a microcredit company with good operation and management, strong risk management, and qualified supervision and evaluation results, can have the restriction on its business region lifted with the consent of the local financial supervision authority, provided that the new region shall not extend beyond the provincial-level administrative region where the company is located. The main source of micro-credit companies’ funds are capital from shareholders and donated funds. Further, a micro-credit company with good operation and management, strong risk management, and qualified supervision and evaluation results may raise funds through external channels in the form of bond issuance, asset securitization, bank loans, or shareholder loans with the consent of the local financial supervision authority.20 Micro-credit companies are market-oriented and are not subject to the upper limits of loan interest rates. However, their loan interest rates must not exceed the upper limits prescribed by the judicial authorities. To encourage micro-credit companies to practice financial inclusion, micro-credit companies are required to offer small and decentralized loans in accordance with regulatory rules and reasonably determine the amount and term of loans in accordance with the borrowers’ income levels, total liabilities, assets, actual demand, and other factors, so that the borrowers’ repayment amounts match their ability to repay. The balance of loans issued by a micro-credit companies to a single borrower shall not exceed 10% of the net assets of the microcredit company, and the balance of loans issued by a micro-credit companies to a single borrower and the borrower’s affiliated parties shall not exceed 15% of the net assets of the micro-credit company. A micro-credit company must clearly agree with the borrower about how the loan will be used and make sure the loan is being used in accordance with the contract to make sure the loan will not be used for investments in stocks, financial derivatives, or real estate financing. Investors of micro-credit companies are diverse, because foreign investors, stateowned enterprises, and private capital can invest in them. Most micro-credit companies run their businesses independently, but some micro-credit companies with strong shareholders adopt a chain operation model (Box 4.3). Certain micro-credit projects led by NGOs have been transformed into microcredit companies with competent qualifications. For example, the Yanchi Microcredit Project, funded by the Amity Foundation in 1996, was reorganized into the Ningxia Dongfang Huimin Microfinance corp., Ltd. after receipt of private capital in 2008. It was the first public welfare micro-credit institution in China successfully transformed into a micro-credit company. At the end of 2008, the China Foundation for Poverty Alleviation, with technical assistance from the International Finance 20

The balance of funds borrowed by micro-credit companies via non-standard financing forms such as bank loans and shareholder loans shall not exceed 1 time of its net assets; the balance of funds borrowed via bond issuance, asset securitization products, and other standardized creditor’s rights assets must not exceed four times its net assets.

4.5 Other Financial Organizations

73

Corporation of the World Bank Group, registered and established Chongho Bridge Management Limited on basis of its microfinance department, which is authorized to manage the Foundation’s micro-credit institutions. In 2009, Chongho Bridge Management Limited began to operate and settle accounts independently, making it the largest public welfare micro-credit institution in China. In 2015, Chongho Bridge Management Limited set up a wholly owned microfinance company and obtained qualifications for the micro-credit business. Chongho Bridge Management Limited’s customers are located in more than 100,000 villages in 20 provinces across China. Of them, 72.25% are female, 77.56% are farmers, 18.61% are ethnic minorities, 37.56% are distributed among 48 ethnic minorities and aged over 45 years old, and 79.80% have an educational background of junior high school or below.21 Box 4.3 Foreign-Invested Micro-credit Companies in China Since the pilot project of micro-credit companies was launched in 2005, many foreign investors who were optimistic about China’s financial market in China successfully invested their resources to establish micro-credit companies. For instance, MicroCred S.A. of France (majority shareholder of Microcred, Temasek of Singapore (holding company of Fullerton Credit), and United Asia Finance Limited of Hong Kong (parent company of United Asia Finance) have rich business experience in the field of micro-credit. Founded in September 2007, Nanchong Microcred Loan Co., Ltd. (headquartered in Nanchong) was the first foreign-funded micro-credit company in China. In November 2010, the investors set up Microcred Loan (Sichuan) Co., Ltd. (headquartered in Chengdu). The two companies have established 52 business outlets, covering 15 prefecture-level cities in Sichuan Province. The products of Microcred include consumer loans available to individuals (loan amounts range from RMB 10,000 to RMB 100,000, loan terms range from three to 24 months, the annualized interest rate is 10.2% as a minimum), and business loans are available to small, medium- and micro-sized enterprises and individual businesses (loan amounts range from RMB 5,000 to RMB 1.5 million, loan term ranges from three to 24 months, and the annualized interest rate is 15.96% as a minimum), and the loan method could be a credit loan, a guaranteed loan, or a mortgage loan. United Asia Finance Limited is the largest independent consumer finance company in Hong Kong. In 2007, United Asia Finance Limited invested and set up a professional micro-credit service institution on the Chinese mainland— Asia United Finance. At present, Asia United Finance is the largest foreignfunded micro-credit company in China, with a national business network and branches in 15 provinces and cities in China. Fullerton Financial Holdings Pte Ltd., a subsidiary of Temasek Holdings of Singapore, established its first independent corporate entity in Chengdu,

21

www.chongho.net.

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4 Organizational System of Financial Inclusion in China

Sichuan Province in September 2008. Since then, it has set up more than 30 branches in Chongqing, Hubei, Yunnan, and the western region of China, with a view toward actively exploring the localization of the “Temasek MicroCredit Model” and focusing on serving small and micro-sized enterprises and individual businesses with an annual turnover of less than RMB 70 million. In recent years, Fullerton Credit has developed the business segment of personal consumer credit and cooperated with big data and financial technology companies to provide installment products for consumers.

4.5.2 Financing Guarantee System China’s financing guarantee system consists mainly of a government financing guarantee with smaller commercial and non-governmental mutual guarantee programs, which operate at the national, provincial, prefecture, and county levels. The financing guarantee system is composed of guarantee companies, guarantee funds, mutual guarantees, risk compensation funds, and re-guarantee mechanisms.

4.5.2.1

Guarantee Companies

Financing guarantee companies in China have gone through three development stages. First, state-owned specialized guarantee companies dominated. Then, private financing guarantee companies became more prominent. Finally, the government financing guarantees became dominate again. Stage I (1993–2002): In the early 1990s, China’s private economy developed rapidly. To alleviate the financing difficulties of private enterprises, in 1999, state-owned professional guarantee institutions established a credit guarantee system for small and medium-sized enterprises, which was composed of guarantee institutions at the central, provincial, and local levels. The service targets of the guarantee institutions covered a wide range of small and medium-sized technology-intensive and laborintensive enterprises that complied with national industry policies, were conductive to technological progress and expansion of urban and rural employment, and had great product and market development potential. Stage II (2003–2012): In 2003, with the promulgation and implementation of the “Law on the Promotion of Small and Medium-Sized Enterprises,” the financing guarantee industry entered a stage of rapid development. For several reasons, including the lack of government financial resources and the national policy of encouraging private investment, market-oriented private financing guarantee companies boomed

4.5 Other Financial Organizations

75

and overtook government guarantees. The service targets were small and micro enterprises and individuals that operated in line with national policy, that had good operating conditions, and that had good credit records, even if they had inadequate collateral. Around 2010, due to the 2008 financial crisis, economic growth declined and the business environment deteriorated in China, resulting in a sharp increase in the risk carried by financing guarantee companies as well as their need to compensate their clients. Moreover, due to insufficient regulation of local governments, operating problems of the financing guarantee companies emerged, such as non-standard operations, illegal operations, and insufficient internal management. In the second half of 2011, following the outbreak of the crisis of the private financing guarantee companies, commercial banks withdrew their cooperation with private financing guarantee companies. Stage III (after 2013): In 2015, the national government made it clear for the first time that financing guarantees are a significant component of the financial inclusion system and declared that financing guarantees should be respected as a quasi-public product and that the government would strongly support them. In 2017, the “Regulations on the Administration of Financing Guarantee Companies” were promulgated, which adjusted the development orientation of the financing guarantee industry to government domination once again, and stated that “the national government shall promote the establishment of a governmental financing guarantee system and the development of government-supported financing guarantee companies.” Financing guarantee companies’ funds mainly come from local financial funds, which focus on serving small and micro enterprises and the three agricultures and have different requirements in terms of leverage ratios, guarantee rates, and risk-sharing ratios for the cooperation between banks and guarantee companies. With the government’s definition and enhancement of the functions and quasi-public product positioning of the financing guarantee industry, governmental financing guarantee institutions gradually came to dominate the industry. By the end of 2021, there were 4,838 financing guarantee corporate entities in China. The state-owned companies accounted for 55.4% and the private and foreign-owned companies accounting for 44.6% of the financing guarantee companies. Compared with 2012, the total number of institutions decreased by 3,752.22

4.5.2.2

Guarantee Funds

Guarantee funds are usually initiated by local governments to provide credit enhancement for financing activities of small, medium- and micro-sized enterprises, the three agricultures, entrepreneurship, and innovation. Certain guarantee funds are funded entirely by the government, while others are set up by the government in partnership with banks. The Credit Guarantee Fund for small and micro-sized enterprises in Taizhou, Zhejiang is a typical example. 22

Lei et al. (2021).

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4 Organizational System of Financial Inclusion in China

Established in November 2014, the Credit Guarantee Fund for small and microsized enterprises in Taizhou, Zhejiang (hereinafter referred to as the “Fund”) was the first “credit guarantee fund for small and micro-sized enterprises” and was founded based on the actual conditions of Taizhou and the experience of similar practices in Taiwan. The Fund is financed through 80% government contributions and 20% donations from financial institutions. It had start-up capital RMB 500 million; the Fund stood at about RMB 1 billion by 2020. The Fund mainly provides credit enhancement guarantees for small and micro-sized enterprises, enterprise shareholders, individual businesses, and farmers in Taizhou. The fund’s primary guarantee model is an indirect guarantee. In this model, a cooperative bank recommends a borrower to apply for a guarantee from the center, and the bank issues the loan to the borrower after the center examines and approves the application. Currently, the number of cooperating banks has expanded from the original seven to 28. The cooperating banks vary and include large-scale state-owned commercial banks, national joint-stock commercial banks, urban commercial banks, rural commercial banks, and rural banks. The maximum credit guarantee provided by the Fund is RMB 8 million for individual enterprises and RMB 3 million for shareholders of small and micro-sized enterprises and individual businesses. The guarantee rate is 0.75% on an annualized basis, which is much lower than the market rate of 1.5–3%, and certain policy-specific products are free. The guarantee provided by the Fund does not require collateral or third-party guarantees and is exempted from deposit or any other fees. The floating interest rate of loans guaranteed by the Fund cannot exceed 60% of the benchmark interest rate of the central bank in the same period; this significantly relieves financing burdens on small and micro-sized enterprises. If any loss is incurred to the guaranteed loan, the loss will be apportioned between the Fund and the lending bank on a pro rata basis. Zhejiang Re-guarantee Co., Ltd. provides re-guarantees for businesses that meet the requirements. By the end of June 2019, the current balance of the Fund was RMB 9.358 billion, the guarantee leverage ratio of the Fund was 9.67, and the guarantee amount per account was RMB 834,000. Among all the accounts, the proportion of the financing guarantee business with a per-account guarantee amount of RMB 5 million and below is 90.91%. The Fund had cumulatively saved insurance premiums equal to RMB 620 million and reduced loan interest by 10% for its clients.23 At present, the Fund has been extended to seven regions inside and outside the province.

4.5.2.3

Mutual Guarantee Organizations

Mutual guarantee organizations are usually voluntarily initiated by the members of a trade associations or a village organization. It is a credit guarantee mutual aid organization set up for the purpose of member investment and member services that plays a supplementary role in the financing guarantee system. Mutual aid deposits provide 23

Data source: “Practice and Enlightenment of Taizhou Credit Guarantee Fund,” National Financing Guarantee Fund: www.ggrdjj.com.

4.5 Other Financial Organizations

77

the main funding source, but certain financial funds and social donations help as well. In 2012, village-level mutual guarantee organizations were successively initiated in Fujian, Zhejiang, and other provinces; this played a positive role in alleviating the difficulties farmers have in using loans and guarantees. For example, in the villagelevel financing guarantee fund established in Sha County, Fujian, farmers contribute RMB 10,000 or 20,000 per household to the fund, and the bank grants credit to the farmers according to their credit ratings. The amount could be equal to two to five times of their contribution amount. The county’s finance department provides financial support to the village-level financing guarantee fund by providing a lump-sum capital contribution of RMB 100,000 when each of the financing guarantee funds is established and guiding the township’s and village’s finance departments to provide further capital contributions and the farmers to participate in the fund to promote the expansion of the fund. By the end of December 2018, 120 village-level financing guarantee funds had been established in Sha County, accounting for 89.47% of all similar funds established in all the county’s administrative villages. A total of 1,661 farmers participated in the RMB 32.97 million fund, and 7,173 households were guaranteed loans amounting to RMB 682 million.24 In 2014, the Huinong Guarantee Cooperative, the first village-level guarantee organization in Huaqiao Village, Lishui, Zhejiang Province was set up to raise a guarantee fund of RMB 800,000 and establish a guarantee cooperative relationship with banks to grant loans to farmers at a maximum of ten times the guarantee deposit. In this village-level mutual-aid guarantee model, the loan application and grant period is shortened from three days to one day, and the interest rate is lower than that of unsecured loans and general guaranteed loans by 35% and 30% respectively. By the end of November 2016, Lishui met its full funding goal. A total of 172 village-level mutual guarantee organizations were established, a guarantee fund of RMB 9,982 was raised, the loan balance was RMB 399 million, the cumulative loans issued amounted to RMB 685 million, and 6173 farmer households benefited.25

4.5.2.4

Risk Compensation Funds

Risk compensation funds are set up by local government departments to support specific industries, specific industries, and particular customer groups and have a certain quota of funds that is used to compensate bank credit losses, ensure the commercial sustainability of business development, improve the positivity of bank credit granting, and support the development of industrial areas in line with policy guidance. The government is their main source of money, but these funds may also use money supplied by financial institutions through joint capital contributions.

24

Data source: Project Group: Local Practice and Thinking on the Construction of Rural Mutual Assistance Guarantee System—Based on the Village-Level Financing Guarantee Fund Model of Shaxian County, Fujian Province, Fujian Finance, 2019, Issue 11. 25 Kong (2017).

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Risk compensation funds usually operate under two models. The first model directly distributes compensation funds to financial institutions, guarantee institutions, and insurance institutions. The amount of compensation is determined at a certain rate of the credit increment, the guarantee balance, and the guarantee insurance coverage of the type of loan (e.g., micro-loan, agricultural loan, green loan, tech loan). The second model is the risk compensation fund pool model, which provides compensation based on a certain proportion of the actual credit loss.

4.5.2.5

Re-guarantee Institutions

Established in 2008, Beijing SME Financing Re-guarantee Co., Ltd. was the first provincial-level re-guarantee organization for small and medium-sized enterprises in China. It has capital of RMB 3.095 billion and conducts business in accordance with the principle of “policy guidance, corporate management, market-oriented operation.” The re-guarantee services provided by the company cover all kinds of guarantees, including loan guarantees and financing guarantees such as collective bond guarantees, collective instrument guarantees, and collective trust guarantees, and non-financing guarantees such as transaction performance guarantees, litigation preservation guarantees, and engineering warranty guarantees, which can effectively meet the financing needs of small, medium- and micro-sized enterprises and the three agricultures at different stages of development. By the end of 2021, the company’s cumulative underwriting exceeded RMB 550 billion, covered more than 130,000 small, medium- and micro-sized enterprises (farmers), and had provided more than RMB 1.1 billion of compensation for more than 550 compensatory projects of 21 guarantee companies.26 To improve the credit guarantee system for small and medium-sized enterprises, re-guarantee institutions were established in different regions of China to provide credit enhancement and insurance-sharing services for policy-oriented guarantee institutions. By the end of 2020, there were 76 financing re-guarantee institutions across China, with a balance of RMB 527.2 billion for financing re-guarantees.27 At the national level, the National Financing Guarantee Fund was established in 2018. It was initiated by the central finance department and jointly funded by voluntary financial institutions. The initial registered capital of the fund was RMB 66.1 billion, in which the Ministry of Finance held 45.39% of shares and the 20 participating banks, insurance, and other institutions held 54.61% of shares. The National Financing Guarantee Fund adheres to a quasi-public orientation as a government financing guarantee institution and provides support to various provinces (regions, cities) to implement financing guarantee services by the investment models of reguarantee risk-sharing and equity investment in accordance with the “policy orientation, market-oriented operation, and specialized management” model with a view 26

Data source: the website of BCRG: www.bjcrg.com. Data source: “Follow the Policy Guidance—Reguarantee Institutions Explore Sustainable Development,” Financial News, December 13, 2021.

27

4.5 Other Financial Organizations

79

toward mobilizing available funds to support small and micro-sized enterprises, the three agricultures, and entrepreneurship and innovation. By the end of 2021, the National Financing Guarantee Fund had established 1203 guarantee agencies covering 2136 counties and districts. The National Financing Guarantee Fund cumulatively realized a total turnover of RMB 1.463153 trillion in the re-guarantee cooperation business and served 1.181 million market entities of varied types. In 2021, the re-guarantee cooperation business for supporting agriculture and small businesses reached RMB 744.976 billion, of which the services provided to clients whose credit was RMB 5 million and below reached RMB 457.001 billion, with the scale proportions of 98.78% and 60.59% respectively.28

4.5.2.6

National Agricultural Credit Guarantee System

In view of the reduced effectiveness of conventional agricultural subsidies, the imbalance between supply and demand for rural finance, and traditional financial institutions lack of motivation to support agriculture, the central government initiated reforms and innovations to provide financial support to agriculture, Specifically, it established a policy-oriented agricultural credit guarantee system funded by financial funds. This program maintains its policy-oriented functionality through the central government’s guaranteed fee subsidization and compensation risk subsidization. The national agricultural credit guarantee system is comprised of the National Agricultural Credit Guarantee Alliance Co., Ltd. (hereinafter referred to as the “NACGA”) and its provincial branches (hereinafter referred to as “Provincial Branches”). Established in 2016, the NACGA falls under the aegis of the national agricultural credit guarantee system. It is funded by the central finance department of China and the provincial agricultural financing guarantee institutions. Its registered capital is RMB 15 billion, including a RMB 3 billion contribution by the central finance department; the remaining capital was funded by provincial agricultural financing guarantee institutions. The total capital of the national agricultural credit guarantee system is RMB 79.4 billion. The NACGA mainly provides reguarantees, personnel training, experience exchanges, and other relevant services for provincial agricultural financing guarantee institutions without engaging in the direct guarantee business. There are 33 Provincial Branches. By the end of 2020, 924 specialized branches had been set up, and 660 business outlets had been put into operation in cooperation with local governments or other financial institutions, covering more than 94% of the counties across China. The guarantee system adheres to the “dual control” model of management. Its scope of business is limited to agricultural production, farmland construction, and integrated industrial development projects directly related to agricultural production. The balance of a single guaranteed client cannot exceed RMB 10 million. The proportion of policy-oriented services shall not be less than 70%, and the upper limit for a single client of policy-oriented services is uniformly set to RMB 100,000 to RMB 3,000,000. The proportion of the credit 28

Data source: the website of National Financing Guarantee Fund (www.ggrdjj.com).

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4 Organizational System of Financial Inclusion in China

guarantee services provided by the agricultural credit guarantee institutions to the qualified entities must not be less than 70% of the total guarantee. By reducing guarantee fees and strengthening cooperation with banks, the comprehensive financing cost of agricultural credit guarantee projects has been controlled to below 8%, which is significantly lower than the comprehensive financing costs in the local rural areas. Additionally, banks have simplified loan application procedures and shortened the examination and approval period, making it easier and more convenient for agricultural businesses to obtain bank loans. From 2017 to 2020, the national agricultural credit guarantee business grew at an average annual rate of 91%. By the end of 2020, the agricultural credit guarantee business in China reached RMB 211.798 billion, with a leverage ratio of 3.4, representing the gradual realization of the policy-oriented functionality. Nationwide, the average amount of agricultural credit guarantee per transaction was RMB 282,800. There are 1.339 million credit clients, of which 749,000 are currently guaranteed, and the policy-oriented services of RMB 100,000 to RMB 3,000,000 account for 90.9% of the program. A total of 636,000 national and provincial projects were supported in the counties targeted for poverty alleviation, with a guarantee amount of RMB 135.4 billion.29

4.5.3 Financing Mutual-Aid Organizations In 2006, in order to explore a new mechanism to improve the use and management of financial poverty alleviation funds, to alleviate the lack of funds for production and development of poverty-stricken households, and to address these households’ limited access to loans, the State Council Leading Group Office of Poverty Alleviation and Development and the Ministry of Finance jointly carried out a pilot project focused on mutual-aid funds for poverty-stricken villages (hereinafter referred to as “Mutual Funds”). Funds from the central financial department along with donated funds and farmer mutual-aid funds were allocated to each project village in the amount of RMB 150,000 to set up poverty alleviation mutual-aid cooperatives to support the development and production of agricultural households. According to government directives, the Mutal Funds are to be “owned by the people, used by the people, managed by the people, shared by the people, and circulation-based.” By the end of 2009, Mutual Funds pilot projects had been implemented in 28 provinces (autonomous regions and municipalities directly under the central government), 940 counties and 9,003 villages across China, with a total capital of RMB 1.7 billion, including RMB 460 million from the central government, RMB 780 million from provincial-level alleviation financing, RMB 360 million from mutualaid funds contributed by farmers, and RMB 100 million from other sources. About 740,000 farmers had joined the mutual-aid organizations, including 370,000 povertystricken households.30 Since 2013, the central government ceased adding funds to 29 30

Data source: the website of the Ministry of Finance. China Rural Finance Service Report 2010.

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the mutual-aid organizations because the provincial governments then operated them independently. Beginning in 2014, to adapt to the needs of the rural cooperative economy, China started to carry out pilot projects of internal credit cooperation in specialized farmer cooperatives in certain regions (Shandong Province, Yutian County, Hebei Province, Jinzhai County, Anhui Province, and Yuanling County, Hunan Province). The goals were to broaden farmers’ financing channels, adjust the surplus and deficits of funds for cooperative members, support the main business of the cooperatives, and enhance the members’ credit and risk awareness. The credit cooperation funds mainly come from the members’ voluntary contributions that are transformed to corresponding shares. Mutual Funds are membership based and use a closed-loop principle. The service targets limited to cooperative members. By the end of 2020, 210 cooperatives in Shandong Province carried out the pilot project of credit mutual aid, with 17,600 participating members, 10,026 business transactions, and a total investment of RMB 386 million. Three cooperatives in Yutian County, Hebei Province carried out the pilot project of credit mutual aid, with 2,411 participating members, member contributions of RMB 48.21 million, and a total investment of RMB 307 million. In Jinzhai County, Anhui Province, 18 cooperatives carried out the pilot project of credit mutual aid, with 9,391 participating members, member contributions of RMB 246 million, and a total investment of RMB 680 million. One cooperative in Yuanling County, Hunan Province carried out the pilot project of credit mutual aid, with 126 participating members, member contributions of RMB 4 million, and a total investment of RMB 17.5 million.31

4.6 Informal Finance Informal finance refers to financing activities such as capital lending and fund-raising that are outside the formal financing system. When the formal financing system cannot satisfy the needs of financial inclusion, informal finance may be able to fill the gap. Informal finance methods are closely tied to regional conditions and the extent of development of the private economy. In economically underdeveloped areas and conventional rural areas with medium economic level, informal finance mainly includes free lending and private fundraising to meet the needs of daily production and life. In economically developed areas, informal finance tends to be more organized and large-scale as there is a greater and more frequent demand for funds.32

31 32

China Rural Finance Service Report 2020. Jiao and Wang (2015).

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References Chen Hongfu et al. Local Practice and Thinking on the Construction of Rural Mutual Assistance Guarantee System: Based on the Village-Level Financing Guarantee Fund Mode of Shaxian County, Fujian Province [J]. Fujian Finance, 2019 (11):69–73 (in Chinese). Jiao Jinpu and Wang Aijian, Financial Inclusion: Basic Principles and China’s Practices, China Financial Publishing House, 2015. Kong Ning: Mutual Guarantee Vitalizes Rural Loans, China Finance, 2017 (05). Lei Yao, Zhu Hongmei, Wu Jing: “Research on China’s Financial Inclusion Risk Sharing Mechanism.” Financial Development Research, 2021, Issue 6. PBC. China Rural Finance Service Report 2008 [R]. China Financial Publishing House, 2009 (in Chinese). PBC. China Rural Finance Service Report 2010 [R]. China Financial Publishing House, 2011 (in Chinese). PBC. China Rural Finance Service Report 2012 [R]. China Financial Publishing House, 2013 (in Chinese). PBC. China Rural Finance Service Report 2016 [R]. China Financial Publishing House, 2017 (in Chinese). PBC. China Rural Finance Service Report 2018 [R]. China Financial Publishing House, 2019 (in Chinese). PBC. China Rural Finance Service Report 2020 [R]. China Financial Publishing House, 2021 (in Chinese). Wang Shuguang et al., Financial Inclusion – Institutional Innovation and Legal Framework in China’s Rural Financial Reconstruction, Peking University Press, July 2013. Wang Jianping, Chen Baifeng. Innovative Development of Regional Equity Market [J]. China Finance, 2022 (04): 43–46.

Chapter 5

Infrastructure of Inclusive Finance in China

Financial infrastructure refers to the systems and institutional arrangements that provide basic public services for various financial activities; it acts as the basic guarantee for the stable and efficient operation of a financial market. In a broad sense, financial infrastructure includes physical facilities for the financial market, financial laws and regulations, accounting systems, information disclosure principles, social credit, and other institutional arrangements. China has recognized the importance of infrastructure as it develops financial inclusion. Improving the payment and settlement system, the credit reference system, the financial consumer education and protection system, the statistical and monitoring system, and the law and regulation system have provided a solid foundation for the development of financial inclusion.

5.1 Payment System 5.1.1 Payment Service Organization System In the late twentieth century, developed countries took the lead in widely applying information technology to the financial field, which greatly modernized financial services and sped up the building of payment systems. By drawing on their experience, the PBOC established a diversified, information-based, and market-oriented development path to build a payment system and gradually formed a diversified payment service organization system. Although the system centered on the PBOC, it also included other banking financial institutions, non-banking payment institutions, and payment and market infrastructure operation institutions. In addition, fintech companies and adding outsourced institutions to the payment industry chain provided professional services for the payment industry.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_5

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Fig. 5.1 Payment and market infrastructure operators

In China, by the end of 2021, there were 4,096 banking financial institutions and 224 non-banking payment institutions with 1,569 branches and 49,400 practitioners. There were 18 payment and market infrastructure operators, including seven payment and clearing system operators: the China National Clearing Center and six chartered clearing institutions (China UnionPay Co., Ltd., City Commercial Banks Clearing Company Limited, Rural Credit Banks Funds Clearing Center Co., Ltd., CrossBorder Interbank Payment System, NetsUnion Clearing Corporation, and American Express). There were four securities registration and settlement system operators: China Securities Depository and Clearing Co., Ltd., China Government Securities Depository Trust & Clearing Co. Ltd., Shanghai Clearing House and Shanghai Stock Exchange Co., Ltd. There were seven central counterparty operators: China Securities Depository and Clearing Co., Ltd., Shanghai Clearing House, Shanghai Futures Exchange, Shanghai International Energy Exchange Co., Ltd., Dalian Commodity Exchange, Zhengzhou Commodity Exchange, and China Financial Futures Exchange (Fig. 5.1).1

1

China Payment Industry Report 2022.

5.1 Payment System

85

Table 5.1 Banking e-payment business in 2021 Business type

Number of transactions

Amount

100 million transactions

RMB 1 trillion

Proportion (%)

Proportion (%)

Online payment

1022.78

37.20

2353.96

79.10

Mobile payment

1512.28

55.00

526.98

17.71

Telephone payment Others Total

2.73

0.10

11.65

0.39

7.70

83.63

2.81

100.00

2976.22

100.00

211.9 2749.69

Data source Payment & Clearing Association of China: China Payment Industry Report 2022, China Financial Publishing House

5.1.2 Use of Payment Tools 5.1.2.1

Use of Accounts and Bank Cards2

To enjoy financial services, one must have an account. By the end of 2021, each Chinese resident had 9.61 bank accounts and 6.55 bank cards on average. In rural areas, 4.87 billion personal bank settlement accounts had been opened, accounting for 35.86% of the total personal bank settlement accounts nationwide, it’s 90% of adults had an active account, a year-on-year increase of 2%.3

5.1.2.2

Use of E-Payment

With the development of the internet and mobile communication technologies, the PBOC has observed more e-payment channels that are no longer dependent on business outlets, which has improved the convenience and coverage of payment services. The use rate of e-payment by Chinese residents has been increasing,4 and the gap between urban and rural areas has been narrowed (Table 5.1, Fig. 5.2).

2

Relevant data are extracted from the Analysis Report on China’s Financial Inclusion Indicators (2021). 3 “Active account” refers to accounts as well as bank settlement accounts and payment account opened with a non-banking payment institution with a transaction in the last six months. 4 E-payment refers to the business initiated by customers via online banking, telephone banking, mobile banking, POS, ATMs, and other electronic channels.

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Fig. 5.2 Proportion of adults using e-payment. Data source Analysis Report on China’s Financial Inclusion Indicators

5.1.3 Main Practices of Enhancing the Inclusiveness of Payment Services 5.1.3.1

Vigorously Promoting Bank Cards in Rural Areas

On the card issuance side, more bank cards were issued by marketing or by issuing with government funds. Special bank cards for agriculture-related entities, such as the Rural Revitalization Theme Card (Box 5.1), were launched, keeping in mind the characteristics and needs of agriculture and rural areas. On the processing side, ATMs, POS machines, and other means were adopted to improve the processing environment of bank cards in rural areas and promote the transformation of cash payment to card payment. As of the end of 2021, the number of bank cards in rural areas reached 3.92 billion. The rural areas has been largely realized “everyone has a bank card, every household has a bank account, and subsidies can be distributed to every household” (Box 5.3).

5.1.3.2

Improving the Payment Service System for Specific Groups

Farmers living in remote areas that were not covered by bank outlets had difficulty withdrawing money. To solve this problem: First, the development of villagelevel e-commerce services was encouraged by relying on the farmer withdrawal service points (Box 5.1). Second, the characteristic service for migrant workers with

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87

bankcards has been constantly performed, effectively alleviating the difficulty of migrant workers in when they returned home (Box 5.2).

5.1.3.3

Promoting the of Banking E-Payment

The government encouraged banking institutions to vigorously market their online banking and mobile banking services based on their physical business outlets. The central government encouraged to carried out a mobile payment convenience demonstration project in 100 major cities across the country in order to achieve interconnected mobile payment in public payments, catering, shopping malls, medical facilities, and other scenarios. In 2019, to further extend mobile payment services to rural areas, regions with better economic foundations and prominent industry were selected for a pilot. China enacted daily payment services and agricultural product distribution services to solve the digital divide and address financial exclusion of payment services in rural areas, thereby improving payment convenience in rural areas.

5.1.3.4

Promoting Non-banking Payment Institutions to Provide Online Payment Services in Rural Areas

Non-banking mobile payment options such as “WeChat Pay” and “Alipay” emerged and rapidly gained acceptance by the general public; rural areas were quickly offered services as well. In 2021, payment institutions completed 1139.961 billion online payments worth RMB 416.86 trillion, including 996.003 billion mobile phone payment transactions worth RMB 359.49 trillion (Boxes 5.1, 5.2 and 5.3).5 Box 5.1 Rural Revitalization Theme Card Guided by the People’s Bank of China, the Rural Revitalization Theme Card (RRTC) was issued jointly by China UnionPay and commercial banks as a special bank card product for farmers, agricultural product brokers, rural cooperatives, and other agriculture-related entities in rural areas. It boasts several features. First, the RRTC has rich functions. In addition to basic payment functions such as deposits, withdrawals, consumption, and transfers, the RRTC provides characteristic services, including issuing agricultural loans, issuing agriculturerelated subsidies, allowing agricultural product production and sales, and providing farmers’ livelihood service. As of the end of 2020, more than 50 banks had issued over 20 million RRTCs.

5

Data source: Payment & Clearing Association of China: China Payment Industry Report 2022, China Financial Publishing House Online payment business statistics include recharge, transfer, consumption and withdrawal.

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Second, the RRTC is deeply integrated with existing mobile payment services. Relying on the “UnionPay” app service platform of the Bank of China, the production and marketing service platform, agricultural product production and marketing matchmaking kit, and other innovative products of UnionPay were integrated to serve both sides of the production and marketing of agricultural products, solve logistics problems, address backwards transaction and settlement methods as well as incomplete information services in the circulation of agricultural products, and promote the efficiency of whole-chain payment services of products of the three agricultures. Third, the RRTC relies on big data to achieve credit enhancement of loans. Big data integrates farmers’ credit information, production and operation information, payment information, and other types of information to give commercial banks more information to make decisions of offering rural credit, thus enhancing farmer’s ability to obtain loans. It also helps meet the short-term capital turnover demands of farmers in their personal life, production, and operations. The RRTC can also track the flow of loans, thereby helping commercial banks monitor whether loans are being used for their intended purpose and strengthen risk management. Fourth, the RRTC has exclusive benefits. The card provides its holder with five basic financial benefits, including a waiver of account opening fees, waiver of the annual inspection fee, waiver of cross-regional withdrawal fee, waiver of the withdrawal fee, and waiver of SMS service fee. In consideration of the practical demands of rural residents, a cardholder also provided with free agriculture-related accident insurance, free legal and medical consultation, free agricultural technology guidance, and other basic benefits. Given the demands of rural customers to deliver agricultural products, a cardholder receives preferential delivery of agricultural products to encourage express companies and other third-party institutions to take part in delivering agricultural products. As of the end of 2020, more than 50 banks had issued over 20 million RRTCs and provided relevant credit facilities over RMB 10 billion.6

Box 5.2 Migrant Workers with Bankcards With growing urbanization in China’s and the enhanced mobility of rural laborers, cross-regional labor export has increased. In 2005, to solve the inconvenience of migrant workers carrying cash to cities and the difficulty of migrant workers withdrawing money back home, the People’s Bank of China organized and implemented bankcards for migrant workers. The card connected the network of China UnionPay to the outlets of rural credit cooperatives and

6

China Rural Finance Service Report 2020.

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the Postal Savings Bank of China, thereby allowing rural residents to withdraw money at the counters of rural credit cooperatives and the Postal Savings Bank of China with any debit card. Specifically, migrant workers are allowed to withdraw cash at the counters of rural credit cooperatives or a Postal Savings Bank of China near their hometown after applying for a bankcard and depositing cash at the bank located in the place where they work. The card has several features. The first is low cost. The withdrawal fee is lower than the general inter-bank withdrawal fee. The second is convenience and speed. Migrant workers may apply for a debit card and deposit cash in the card only with their ID cards. The service outlets almost cover all rural areas, which migrant workers can use to withdraw cash or inquire about transactions at any outlet near their hometown. The bankcards for migrant workers effectively solved the security problem of migrant workers returning home with a large amount of cash and allowed a large portion of the migrant workers’ income to return with them to rural areas. As of the end of 2019, the total number of transactions made with a migrant worker bankcard was 997.942 billion.7

5.2 Credit Reference System “Credit reference” refers to the activity of collecting, sorting, preserving, and processing the credit information of natural persons, legal persons, and other entities according to law and providing external services such as credit reports, credit evaluations and credit inquiries to help customers judge and control credit risks and carry out credit management. A credit reference system can effectively alleviate the information asymmetry between financial service suppliers and demanders by establishing effective credit records and dissemination mechanisms, which are conducive to expanding the coverage of financial services. As an important part of the financial infrastructure, the credit reference system plays a vital role in the development of financial inclusion.

5.2.1 The Credit Reference Market China’s credit reference market faces a completely different background and development environment from those of developed countries. On the one hand, China has a huge economy, a financial market that has rapidly developed, and a strong demand for credit reference services. On the other hand, there are significant differences 7

Data source: Social Responsibility Report of China Payment Industry 2020.

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between regions and industries and the information environment needs improving, which has restricted the development of the credit reference market. It is inconsistent with the realistic needs of economic and social development to let the credit reference market develop spontaneously or to allow the government to completely take charge of it. Therefore, China has adopted a dual “government + market” and “national + local” policy for the credit reference market and established a credit reference market system with staggered development and complementary functions based on the national basic database of financial credit information and supplemented by market-oriented credit reference institutions and local credit reference platforms.

5.2.1.1

The National Basic Database of Financial Credit Information

In 1997, to adapt to economic development, drive the credit market to develop, and maintain financial stability, the PBOC established the bank credit registration and consultation system (the predecessor of the enterprise credit reference system). From 2004 to 2006, the PBOC coordinated financial institutions’ building of a national centralized and unified credit reference systems—the national basic database of financial credit information. The Credit Reference Center of the People’s Bank of China was responsible for the construction, operation, and maintenance of the credit reference system. The credit reference system was built following best practices abroad and adopting the national centralized database model to comprehensively collect positive and negative credit information about enterprises and individuals. The types of information collected includes credit information as well as public information from government departments, courts, and public utilities concerning payments. The credit reference system has been transformed into the largest and most complete credit information basic database in China. It has a credit archive for almost every enterprise and individual with credit activities in China, It records comprehensive and objective information about enterprises and individuals concerning their borrowing and repayment histories, their compliance with contracts, and their compliance with and laws. As of the end of 2020, the credit reference system had collected the information of 1.1 billion natural persons and 60.923 million enterprises and other entities, including 610 million natural persons with credit records, and 8.334 million enterprises and other entities with credit records8 (Table 5.2). The credit reference system covers the national credit market and has access to all types of credit institutions, including all banking financial institutions, microcredit companies, financial guarantee companies, financial leasing companies, insurance companies, and securities companies. As of the end of 2020, the enterprise credit reference system and the individual credit reference system were respectively accessed to 3,712 and 1,904 legal persons, respectively. The core products of the credit reference systems are enterprise and individual credit reports, which are mainly used for lending, credit card approval, and post-loan 8

Data source: China Credit Reference Report 2020.

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Table 5.2 Entities with credit information included in the credit reference system Year

Number of enterprises and other entities included

Number of natural persons included

Total

With credit records

Total

With credit records

2010

16.97 million

7.909 million

777 million

225 million

2020

60.923 million

8.334 million

1.1 billion

610 million

Data source China Credit Reference Industry Development Report (2003–2013), and China Credit Reference Report 2020

Fig. 5.3 Inquiry volume of the credit reference systems. Data source China Credit Reference Industry Development Report (2003–2013), and China Credit Reference Report 2020

management of credit institutions, are widely used by government departments to perform their duties, and are also used by individuals and enterprises to participate in credit activities. The credit reference systems provide multiple access and inquiry models, and the inquiry volume has grown rapidly (Fig. 5.3). Institutional users may access the credit reference systems via financial private networks, provincial platforms, and the internet. The entities of credit information may inquire about their reports via counters, bank online service channels, self-service machines, the internet and other forms.

5.2.1.2

Market-Oriented Credit Reference Institutions

Enterprise credit reference institutions must establish archives with the PBOC. As of the end of 2020, 131 enterprise credit reference institutions established archives with the PBOC; these institutions are distributed in 23 provinces across the country

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and mainly concentrated in economically developed areas such as Beijing, Shanghai, and Guangdong.9 Enterprise credit reference institutions use cooperation agreements, open online channels, and sharing and exchanging among government departments, public utilities, and institutions to collect information about enterprises. As of the end of 2020, the enterprise credit reference institutions was able to obtain information about registration, administrative punishments, patents, financial affairs of listed companies, and information actively disclosed by market entities through the internet and other channels of information for public market entities such as administrative departments, judicial departments, and exchanges. The enterprise credit reference institutions provide basic credit reporting services such as enterprise credit reports and investigation reports as well as credit valueadded services such as enterprise credit scores, enterprise credit information authentication, credit risk control, and anti-fraud measures. Guided by authorities, the credit reference institutions use non-credit alternative data such as market supervision, tax payments, production and operation, utility payments, blockchain, big data, and other technologies to create realistic and diversified credit products that serve the financing of small and micro-sized enterprises. This information helps banks judge the credit-worthiness of small and micro-sized enterprises and improves banks’ ability to acquire customers and control risk. Because of personal privacy and property rights implications, individual credit references are complex and sensitive. Therefore, authorities have always taken a cautious attitude toward approving individual credit reference institutions. However, two market-oriented individual credit reference institutions were approved and opened in January 2018 and December 2020.

5.2.1.3

Local Credit Reference Platforms

The PBOC urged provincial and municipal governments to establish local credit reference platforms with non-credit alternative data of small and micro-sized enterprises as the core and encouraged local government departments and utility units to disclose information and use their public credit information in the financial field as the alternative data source for financial credit information, thereby alleviating the information asymmetry in the financing of small and micro-sized enterprises. A local credit reference platform provides financial institutions and small and micro-sized enterprises with comprehensive services such as supply and demand matchmaking, information inquiry, credit evaluation, early risk warning, and risk sharing. By the end of 2020, six provincial-level platforms and more than 30 municipal-level platforms had been built in China. The “Yangtze River Delta Credit Chain,” the “Pearl River Delta Credit Chain,” and the “Beijing-Tianjin-Hebei Credit Chain” were built to realize

9

Data source: Credit Information System Bureau of the People’s Bank of China: China Credit Reference Report 2020, China Financial Publishing House.

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cross-regional interconnection and sharing of enterprise-related credit information and to help enterprises with cross-regional financing (Box 5.4). Box 5.3 Local Credit Reference Platform—Yue Xin Rong “Yue Xin Rong” (the credit information and financing matchmaking platform for small, medium- and micro-sized enterprises in Guangdong Province) is a provincial level local credit reference platform jointly built by the Guangzhou branch of the People’s Bank of China and relevant departments of the Guangdong provincial government. Small, medium- and micro-sized enterprises, financial institutions, and the People’s Bank of China take part in its operation. On this platform, government departments can share government information, small and micro-sized enterprises can release financing demand information, and banks can release credit product information. When authorized by an enterprise, a bank may inquire about the enterprise’s credit information on the “Yue Xin Rong” database to aid the bank’s credit decision. By the end of April 2022, the “Yue Xin Rong” credit reference platform had collected 820 million pieces of data involving more than 14 million market entities in almost the entire Guangdong Province. The platform had been accessed by 13,000 outlets of 207, 4,378 credit products had been released on it, 1,552,500 had been registered with the platform, and the platform had received 27.36 million requests for credit information. Since 2020, the platform has facilitated 270,000 bank-enterprise financing transactions worth RMB 720 billion.10

5.2.2 Building of the Credit Information System for Small, Medium- and Micro-sized Enterprises The building of the credit information system for small, medium- and microsized enterprises began in 2006 when branches of the PBOC were asked to establish archives for small and medium-sized enterprises, and carry out credit cultivation, financing matchmaking and other work. Since 2014, a three-layered building direction has been gradually formed. First, cluster the strength of various parties to establish local credit information systems for small, medium- and micro-sized enterprises. Most of the collected data were non-banking credit data such as enterprise registration information, government information and utility information; the services provided were mainly external credit report and credit status analysis. Relying on the credit information systems of 10

Yue Xin Rong: help financial services grant loans to small- and micro-sized enterprises, https:// finance.sina.com.cn/money/bank/bank_yhfg/2022-06-09/doc-imizmscu5873675.shtml?finpagefr= p_115.

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small, medium- and micro-sized enterprises, branches of the PBOC carried out credit information collection, credit evaluation, selection of creditable enterprises, online financing matchmaking and other activities; promoted local government departments to formulate credit-based incentive policies; guided financial institutions to innovate financial products and services; determined the loan limit and interest rate according to the credit rating; reduced the financing cost of small, medium- and micro-sized enterprises. As of the end of 2020, 200 credit information systems for small, medium- and micro-sized enterprises had been built nationwide, some led by local governments and the other by the PBOC. Second, promote the construction of market-oriented local credit reference platforms. In view of that the basic information of small and micro-sized enterprises was scattered in local government departments, the PBOC urged local governments to integrate non-credit alternative data and build their market-oriented local credit reference platforms. As a result, the “Taizhou Model” and the “Suzhou Model” of credit reference service for the financing of small and micro-sized enterprises were formed and have been promoted nationwide. Third, give full play to the role of market-oriented enterprise credit reference institutions. The PBOC actively guided enterprise credit reference institutions to explore the use of non-credit alternative data and internet information technologies such as artificial intelligence, blockchain, big data and cloud computing to create various forms of credit products to serve the financing of small and micro-sized enterprises.

5.2.3 Building of the Rural Credit Information System Since 2009, the People’s Bank of China has built a rural credit information system pilot zones and rural credit information platforms, and carried out credit evaluation and publicity jointly with relevant departments, thereby promoting the building of the rural credit information systems and laying a foundation for improving rural financial services (Box 5.5). First, building the information platforms. Local governments were promoted to build rural credit information service platforms in consideration of their local conditions to collect, sort out and evaluate farmers’ credit information, so as to achieve the sharing of rural credit information among local governments and agriculture-related financial institutions. As of the end of 2020, 270 credit information systems for farmers had been built and nearly 190 million credit archives had been established for farmers nationwide, of which 133 million farmers have been evaluated for credit. Second, strengthen the application of credit evaluation results. The strength of local governments, relevant departments, financial institutions and intermediary institutions were released to vigorously promote the evaluation and creation of “creditable farmers”, “creditable villages” and “creditable townships (towns)” in rural areas and give them preferential policies on credit limit, loan interest rate, lending procedure,

5.2 Credit Reference System

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agricultural re-loan and other financial services, thereby forming a demonstration and driving effect. Third, widely carry out propaganda on credit in rural areas. Activities like national education, financial inclusion publicity, “June 14 Credit Record Care Day”, credit knowledge publicity and “sending credit information to the countryside” were performed. Box 5.4 Lishui Case of Rural Credit Information System Construction Lishui is a major agricultural city in Zhejiang Province, with 176 townships and 3,453 administrative villages and an agricultural population of 2.1 million, accounting for 84.5% of its total population. To solve the information asymmetry in farmers’ financing, Lishui City actively promoted the construction of rural credit information systems, and cleared a new way to solve farmers’ difficulties in financing with establishing credit information archives for them as the main content and performing credit evaluation for them as the entry point. Main practices: First, build credit information service platforms. In 2009, Lishui Branch of the People’s Bank of China independently developed the “credit information system for farmers” to establish electronic archives for their credit information. In order to further improve the efficiency of information collection and optimize the platform service functions, Lishui City launched the development of “Lishui City Credit Information Service Platform” on the basis of the “credit information system for farmers,” which officially went online in September 2018. This new platform clusters more than 60 functions, realize the co-construction and sharing of credit information of government departments and banking institutions in terms of market supervision, taxation, court, social security, rural property right, and utilities, and establish electronic credit information archives for farmers between 18 and 60, new agricultural business entities, as well as small and micro-sized enterprises. Second, carry out credit evaluation. Lishui City carried out credit evaluation for farmers in the order of initial evaluation by administrative villages, re-evaluation by townships and towns, and final review by counties, and implemented a credit evaluation result display system. Third, widely build “creditable farmers,” “creditable villages,” “creditable townships (towns),” and “creditable counties.” As of the end of 2021, there were 567,000 creditable farmers, 790 creditable villages (communities) and 45 creditable townships (towns and streets) in Lishui City. Fourth, provide credit incentives. Financial institutions were asked to take into account their own realities in formulating preferential loan policies for creditable farmers and creditable villages (towns), and take measures such as loan priority, quota increase, simplified procedure and preferential interest rate, thereby providing more financing convenience and benefits for the creditable farmers. For example, Lishui’s rural credit cooperative system included all

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farmers aged 20–65 who were not on the negative lists of drug addiction, drug abuse, private lending, overdue loan, litigation, etc. in the credit list. The farmers were allowed to obtain the corresponding amount of credit facilities without providing any information or filling in any form. Banks returned the credit results to the farmers by door-to-door visit, phone call, SMS and other means. The farmers could borrow and lend on demand via mobile banking. Currently, the farmers’ credit facility with a credit line of more than RMB 30,000 have covered 100% administrative villages and 100% eligible farmers.

5.2.4 Chattel Financing Registration and Publicity System In 2007, the Credit Reference Center of the People’s Bank of China built a registration and publicity system for pledge of accounts receivable in accordance with the Real Right Law of the People’s Republic of China and international experience, which provides online various registration and inquiry services such as pledge and transfer of accounts receivable, financial leasing, deposit pledge, inventory and warehouse receipt pledge. In 2009, the financial leasing registration and publicity system went online to provide financial leasing registration and inquiry services. On January 1, 2021, the Unified Registration and Publicity System for Chattel Financing was officially launched, aiming to carry out unified registration of seven categories of chattels and power guarantees such as production equipment, raw materials, semifinished products, product mortgage, pledge of accounts receivable, financial leasing and factoring.

5.2.5 Service Platform for Accounts Receivable Financing In order to alleviate information asymmetry, account confirmation difficulties and notification difficulties in accounts receivable financing, and promote the development of accounts receivable financing business and help small, medium- and microsized enterprises relieve their financing difficulties, the Credit Reference Center of the People’s Bank of China built a national electronic information service platform for accounts receivable financing—the accounts receivable financing service platform in 2013. The platform served as a financial infrastructure and an information bridge for financial institutions and enterprises to carry out accounts receivable financing, and helped improve the efficiency of supply chain financing business by realizing the automated and real-time transmission of accounts receivable data. By the end of 2020, the platform had facilitated RMB 13.3 trillion in financing, including RMB

5.3 Education and Protection of Financial Consumers

97

Fig. 5.4 Annual financing facilitated by the accounts receivable financing service platform (2016– 2020). Data source China Credit Reference Report 2020 prepared by the Credit Information System Bureau of the People’s Bank of China, China Financial Publishing House

10.1 for trillion small, medium- and micro-sized enterprises, accounting for 76% of the total amount (Fig. 5.4).

5.3 Education and Protection of Financial Consumers In the process of vigorously promoting financial inclusion, the People’s Bank of China and the financial regulators set up specialized organs (Table 5.3) to actively explore the model of protecting financial consumers’ rights and interests, improve the working mechanism, deeply promote the popularization and education of financial knowledge in line with China’s conditions, cultivate the public’s awareness of financial risks, and strengthen the people’s awareness of safeguarding rights, risk prevention and self-protection.

5.3.1 Protection of Financial Consumers 5.3.1.1

Establish a Financial Consumer Protection System

In November 2015, the General Office of the State Council issued the “Guiding Opinions on Strengthening the Protection of the Rights and Interests of Financial Consumers” (The “Opinions”). The Opinions provided specific provisions on protecting the rights and interests of financial consumers at the national level for

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Table 5.3 Information of the financial consumer protection units Institution name

Establishment time

Main duties

The People’s Bank Financial of China Consumer Protection Bureau

2012

To set up and improve mechanisms and measures to protect the rights and interests of financial consumers; accept, investigate and regulate complaints from financial consumers; supervise, inspect, investigate and deal with relevant violations of laws and regulations. To coordinate consumer protection issues related to cross-market and cross-industry financial products and services, and implement the financial consumer education and consultation systems

China Banking Regulatory Commission

Banking Consumer Protection Bureau

2012

To formulate master plans, policies and regulations for the protection of consumer’s rights and interests in the banking industry; coordinate and promote the establishment and improvement of consumer service, education and protection mechanisms; establish and improve the operation mechanisms for complaint acceptance and processing; organize and carry out supervision and inspection for the implementation of consumer rights and interests protection in the banking industry; and correct and punish improper behaviors according to laws; plan and organize the publicity and education for banking consumers

China Securities Regulatory Commission

Investor Protection Bureau

2012

To take charge of the overall planning, organization and guidance, supervision and inspection, assessment and evaluation of investor protection; promote the establishment and improvement of relevant laws, regulations and policy systems for investor protection; promote and improve the mechanisms for investor protection; facilitate legal remedies for the infringed rights and interests of investors (continued)

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Table 5.3 (continued)

China Insurance Regulatory Commission

Institution name

Establishment time

Main duties

Insurance Consumer Protection Bureau

2011

To prepare rules, regulations and policies related to the protection of the rights and interests of insurance consumers; study the working mechanisms of protecting the rights and interests of insurance consumers; receive complaints and consultations from insurance consumers, and carry out insurance consumer education and service information system construction; guide the industry integrity construction and supervise insurance institutions to disclose information

Note In 2018, China Banking Regulatory Commission and China Insurance Regulatory Commission was merged into China Banking and Insurance Regulatory Commission, Banking Consumer Protection Bureau and Insurance Consumer Protection Bureau was merged into the Consumer Protection Bureau of CBIRC

the first time; proposed that it should adhere to the principles of market and rule of law, insist in combining prudential supervision and behavioral supervision, establish and improve the regulatory mechanisms and guarantee mechanisms for protecting the rights and interests of financial consumers, normalize the behaviors of financial institutions, foster a fair competition and honest market environment, effectively safeguard the legitimate rights and interests of financial consumers, prevent and resolve financial risks, and promote the sustainable and healthy development of the financial industry; required that it must regulate the behaviors of financial institutions, incorporate protecting the legitimate rights and interests of financial consumers into corporate governance, corporate culture construction and business development strategy of financial institutions, make overall planning, establish the appropriateness system of financial consumers, fully respect and consciously protect the eight rights of financial consumers including: the right to property security, the right to know, the right to select on one’s own, the right to fair trade, the right to claim compensation according to law, the right to education, the right to respect, and the right to information security; and asked financial management departments to strengthen supervision and inspection according to law, establish and improve the mechanisms for handling financial consumer complaints, and establish diversified mechanisms to resolve the disputes between financial consumers.

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Improve the Mechanisms for Resolving Consumer Disputes and the Mechanisms for Protecting the Rights and Interests of Financial Consumers

The People’s Bank of China has established a financial consumer protection information management platform with the system itself as the trunk, and www.123 63.org (the website for the protection of financial consumers’ rights and interests) and “12,363” (the hotline for consultation and complaint on the protection of financial consumers’ rights and interests) as the two wings. The People’s Bank of China has its system for receiving and handling financial consumer complaints fully covered rural areas in China. People’s Bank of China and CBIRC have deeply explored the non-litigation settlement mechanism for financial consumption disputes, launched pilots of third-party non-litigation settlement mechanism for financial consumption disputes in more than 20 provincial-level regions, including Shanghai and Guangdong, and set up over 200 dispute mediation organizations.

5.3.1.3

Conduct Supervision and Inspection and Strengthen Regulation and Restraint

The People’s Bank of China regularly organizes supervision and inspection on the protection of financial consumers’ rights and interests, covering banking financial institutions and non-banking payment institutions, and carries out special actions in the field of bankcard and personal financial information protection. CBIRC supervises and evaluates the protection of consumers’ rights and interests by banking and insurance institutions, regularly releases consumer complaints in the banking and insurance industries, and urges banking and insurance financial institutions to improve their mechanisms and works.

5.3.2 Financial Consumer Education 5.3.2.1

Carry out Centralized Financial Knowledge Popularization Activities

The People’s Bank of China and China Banking Regulatory Commission carries out “financial knowledge popularization month” and “banking financial knowledge publicity service month” in every September and lists rural residents as the key targets of financial education. The PBOC organizes financial knowledge publicity and education activities every year from 2014 during the “March 15 World Consumer Rights Day.” The goal is to perform publicity and education targeting at the weak

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links of rural residents in financial qualification, form a range of branded activities such as “financial knowledge in rural areas” and “financial night school,” and enhance rural residents’ financial risk awareness and their self-protection abilities (Box 5.6).

5.3.2.2

Build Financial Education Demonstration Bases Rural Areas

Guided by the PBOC, local governments built financial education demonstration bases in rural areas, carried out various forms of financial knowledge popularization and education activities for rural residents and poverty-stricken groups, established credit awareness and risk awareness for the key service objects of financial inclusion, enhanced their understanding of financial inclusion and basic financial skills, and improved the sense of access of the people to financial services. The People’s Bank of China constructed financial knowledge popularization stations in rural areas, and actively built a team of volunteers for financial knowledge popularization.

5.3.2.3

Promote the Incorporation of Financial Knowledge into the National Education System

The financial management departments strengthened their communication and coordination with the education departments, provided the Ministry of Education with the key points of financial knowledge in primary and secondary schools, and promoted the incorporation of financial knowledge into the national education system in rural areas. Shanxi, Fujian and other provinces that first carried out the pilot of integrating financial knowledge into the national education system have achieved full provincial coverage of this incorporation. China Foundation for Development of Financial Education was supported to expand the “Jinhui Project” (column 5.6) to give play to its brand effect, and the financial classroom enlightenment education has been continuously performed for the youth in poverty-stricken areas, so as to help them grasp necessary financial knowledge as soon as possible and improve their confidence and ability to get rid of poverty.

5.3.2.4

Carry out Assessment of Residents’ Financial Qualifications

In 2016, the PBOC formally established a consumer financial qualification questionnaire system, and designed financial qualification evaluation indicators in terms of financial knowledge, skill, behavior and attitude (Box 5.6). Since 2017, a questionnaire on consumer’s financial qualification has been conducted every two years in 31 provincial administrative units (except Hong Kong, Macao, and Taiwan).

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Box 5.5 Financial Knowledge Popularization Education and Training in Rural Areas—Jinhui Project China Foundation for Development of Financial Education is a charity organization registered with the Ministry of Civil Affairs. The Foundation holds charity activities related to financial education by relying on the support and donations from all walks of life. The Foundation has carried out the charity project about financial knowledge popularization, education and training— the Jinhui Project for poverty-stricken areas in central and western China. The Jinhui Project provided financial knowledge popularization education and training for farmers, grassroots cadres, middle school students and practitioners of rural financial institutions in poverty-stricken areas to help them grasp necessary financial knowledge and financial instruments, and strengthen their awareness of integrity and financial risk. The Jinhui Project also required rural financial inclusion to establish the concept of financial inclusion, grasp advanced small and micro loan technologies, and improve their financial services in rural areas. With the support of relevant national policies, the Foundation has raised funds from all walks of life and adopted various cooperation channels to expand the Jinhui Project since 2015. The Jinhui Project has been implemented in 832 counties in 24 provinces (cities and autonomous regions), with its financial education benefiting 150 million rural residents and rural financial consumers and fully covering all poverty-stricken villages in severely poverty-stricken areas in China.

Box 5.6 Practices of Financial Inclusion Education in Yijun County Yijun County, Shaanxi Province, has been rated as the national pilot of financial knowledge in rural areas and key promotion zone of the Jinhui Project as it has achieved positive results with its complete working mechanism in financial publicity and education. First, focus on improving the financial qualification of farmers. In Yijun County, they strengthened farmers awareness of “learning, understanding and using finance” and enabled them to actively use modern financial instruments in production and life through continuous financial publicity and education. Second, formulate development plans for financial education, and carry out financial education by different levels, groups, and content. For industry leaders, they provided publicity and training on project financing, fund transfer, credit management, etc., plus the industrial development support policies given by relevant departments of the local government; for migrant workers returning home to start their own businesses, they mainly carried out training on small guaranteed loans, soft loans and other knowledge that supports entrepreneurial financing on the basis of entrepreneurship and professional technology training.

5.4 Statistical and Monitoring System of Financial Inclusion

103

As for migrant worker in the urban area, they mainly conducted publicity and training on modern payment applications, loan products, credit consumption, etc. For those who stayed in their hometown to work in agriculture, they mainly provided publicity on identification of counterfeit money, the service of helping farmers with withdrawal, and protection of financial rights and interests. Third, build a batch of inclusive financial inclusion education and training bases. The “terminal” of rural financial inclusion education and training base was set up at Yijun County Government, and “stations” of rural financial inclusion education and training base were set up in every administrative villages, thereby forming a financial education network system covering all administrative villages. Fourth, prepare and publish the Book of Financial Inclusion, and offer financial knowledge popularization courses in three pilot middle schools in Yijun county. Fifth, carry out publicity and education activities themed on financial inclusion. In the “financial knowledge popularization month,” a special column on financial inclusion was set up, a series of comics on financial inclusion was prepared, a cultural tour was organized, and publicity machines for financial knowledge were deployed. In this way, financial knowledge was infiltrated into daily life in a way that the people enjoy. Sixth, build a volunteer team. A financial inclusion volunteer team composed of government cadres at all levels, practitioners of financial inclusion and teachers was built and

5.4 Statistical and Monitoring System of Financial Inclusion 5.4.1 Statistics of Agriculture-Related Loans In 2007, the People’s Bank of China and the China Banking Regulatory Commission jointly developed the Special Statistical System for Agriculture-Related Loans, which determined that the PBOC ought to reflect the statistical framework of threeagriculture loans from three dimensions of region, subject and purpose under the concept of all agriculture-related loans, establish a statistical system for agriculturerelated loans of banking financial institutions, and prepare quarter statistical reports on agriculture-related loans of financial institutions at the national, provincial, municipal and county levels.

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5.4.2 Statistics of Small and Micro Loans According to the development of small and micro-sized enterprises in different periods and the key support they get, statistics was carried out for the following three types of small and micro loans: 1. Loans for small and micro-sized enterprises: the loans granted by commercial banks to small- and micro-sized enterprises and the personal operating loans. From 2011 to 2013, the regulators took this type of loans as their assessment index. 2. Full-coverage loans for small and micro-sized enterprises: the loans to smalland micro-sized enterprises, the loans to individual industrial and commercial entities, and the loans to owners of small and micro-sized enterprises. From 2013 to 2017, this type of loans was taken as the assessment index. 3. Inclusive loans for small and micro-sized enterprises: the Loans to small and micro-sized enterprises, individual industrial and commercial entities and the loans to owners of small and micro-sized enterprises with a single credit of less than RMB 10 million. Since 2018, this type of loans has been taken as the assessment index.

5.4.3 Financial Inclusion Indicator System At the end of 2016, the People’s Bank of China established China’s financial inclusion indicator system and declaration system. China’s financial inclusion indicator system combines global, forward-looking, and Chinese features, and includes 51 indicators of 21 categories under the three dimensions of use, availability and quality of financial services. Most of the indicator data came from the existing statistical systems, and eight indicators were collected from consumers via questionnaires. Since 2017, the People’s Bank of China has issued the “Analysis Report on China’s Inclusive Financial Inclusion” every year.

References Payment & Clearing Association of China. Social Responsibility Report of China Payment Industry 2020 [R] (in Chinese). Payment & Clearing Association of China. China Payment Industry Report 2022 [R]. China Financial Publishing House, 2022 (in Chinese). PBC. China Rural Finance Service Report 2020 [R]. China Financial Publishing House, 2021 (in Chinese). PBC. China’s Financial Inclusion Indicators 2021 [R]. China Financial Publishing House, 2022 (in Chinese).

Chapter 6

Innovative Practices of Inclusive Finance in China

Guided by the policy of inclusive finance, financial institutions have adapted to the characteristics and needs of the three-agricultures, small and micro-sized enterprises, low-income groups, and other inclusive financial service targets, continuously improved reform and innovation, broken the traditional business model by using digital technology and other technological means, provided tailor-made products and services, to expand the coverage of financial services and improve the convenience of services. A number of representational innovative practices have emerged.

6.1 Expand the Coverage of Basic Financial Services with Multiple Measures Rural areas, especially remote mountainous areas and poverty-stricken areas, are the “last mile” of financial services coverage. In 2009, there were 2,945 financial institution blank townships across the country, of which more than 80% were located in the less developed western regions. Among them, 2,237 townships had financial services, while 708 townships could not any financial services.1 In October 2009, the full coverage of basic financial services in remote rural areas was initiated by the CBRC to guide financial institutions to effectively extend their financial services through the establishment of additional service branches in counties, the deployment of physical machines for financial services, and the development of fixed-point or mobile financial services. Since 2010, the People’s Bank of China has been offering the service of helping farmers withdraw money with bankcards to help them meet basic financial needs in remote areas. In 2014, the CBRC launched and started to implement the “Village Branch” project for basic financial services, giving priority to administrative villages without any form of financial services to solve the problems 1

Notice by the CBRC of Effectively Conducting Work on Providing Services To Financial Institution Blank Townships, YJBF [2009] No. 387.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_6

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Fig. 6.1 Number of townships without financial institutions across the country (PCS). Data sources China Rural Finance Service Report

of basic financial services such as saving and withdrawing and money transfer. In the villages that have overcome the challenges of basic financial services, active conditions should be created to continuously enrich the service functions and gradually enrich the services in terms of inquiries, bank cards, acceptance of micro loan applications and collection of basic credit information. In villages with potential service needs and business bases, agent bill payment, insurance, wealth management and securities business should be provided. The constraints of the “last mile” branches, which are beyond physical reach, should be broken by making full use of internet financial technology, landlines, internet and mobile communication networks. By the end of 2020, the national coverage rate of banking financial institutions in townships was 97.13%, and the national coverage rate of basic financial services in administrative villages was 99.97%. The number of financial institution blank townships decreased from 2,945 in October 2009 to 892 in 2020 (Fig. 6.1).2 A variety of measures are employed by financial institutions to actively expand the scope of financial services, accelerate the sinking to the rural market and effectively expand the coverage of rural financial services. For example, the Agricultural Bank of China has taken various ways to enhance the inclusive level of financial services. First, branch resources are tilted to the county level layout. There are 12,600 county branches of Agricultural Bank of China, which have been established in all counties of the country. In 2021, 65% of the relocated and new branches of Agricultural Bank of China were laid out in the county, urban–rural interface, and rural areas.3 Second, vigorous efforts are made to promote the construction of agricultural branches. As an effective supplement to physical branches, Agricultural Bank of China has set 2 3

Data source: China Rural Finance Service Report 2020. Data source: Xu (2022).

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up beneficiary service branches in rural stores and agricultural stores to provide convenient basic financial services such as inquiry, transfer, consumption and cash withdrawal in rural areas. Regarding the even more remote areas, a mobile financial service vehicle has been provided by Agricultural Bank of China to serve rural clients with convenient and fast basic financial services in villages. Third, innovation in mobile banking and other online channels has been reinforced. In response to the special needs of mobile banking in rural areas, a rural version of mobile bank that is more in line with farmers’ usage habits has been designed by Agricultural Bank of China. At the same time, it has launched the action of “promoting mobile bank in villages,” followed the model of promoting in a village, set up demonstration villages of mobile bank, and carried out centralized signing of mobile bank by using mobile off-line equipment to expand the coverage of mobile finance (Box 6.1). Box 6.1 The Service of Helping Farmers Withdraw Money with Bankcards In 2010, to effectively satisfy the basic financial demands in remote rural areas such as the issuance of various agricultural subsidies, daily small-amount cash withdrawal, balance inquiry, etc., the People’s Bank of China piloted the service of helping farmers withdraw money with bankcards in many provinces and cities. The bank card acquirers were asked to deploy processing terminals at designated cooperative merchant service points in villages, townships, and towns to provide small-amount withdrawal and balance inquiry services to debit card holders. In 2011, after summing up the pilot experience, the People’s Bank of China promoted the service of helping farmers withdraw money with bankcards to the whole country. In 2014, in view of the reality that the withdrawal business was undiversified while the payment demand of farmers was increasingly diversified, the People’s Bank of China further clarified that the acquirers could rely on the service points of helping farmers withdraw money with bankcards to perform cash remittance, transfer remittance, agent payment and other basic payment businesses, which effectively alleviated the inconvenience of remittance and the inconvenient payment of water, electricity and gas charges for rural residents. In 2015, it was proposed that the construction of village-level e-commerce service points and the service points of helping farmers withdraw money with bankcards should be jointly encouraged, so as to mutually complement their advantages, integrate resources and improve utilization efficiency. After more than a decade of practice, the number of the service points of helping farmers withdraw money with bankcards has achieved a leapfrog increase, for which administrative villages were almost covered by bank services. As of the end of 2020, there were 893,300 service points of helping farmers withdraw money with bankcards, covering 519,300 village-level administrative areas. The basic payment services centered on the service of

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helping farmers withdraw money with bankcards covered almost all the villagelevel administrative areas. Farmers were able to withdraw money, remit money and pay fees on behalf of others without leaving their villages. The longstanding problem of farmers in remote areas having to travel a long way to and from bank outlets with high costs was solved. 200,800 service points of helping farmers withdraw money with bankcards were loaded with village-level ecommerce services, accounting for 22.48% of the total service points.4 Some agencies further brought the role of the internet into play and satisfied the demands of farmers by relying on the service network of helping farmers withdraw money with bankcards, adapting their measures to local conditions, and further providing services such as rural e-commerce, financial knowledge propaganda, anti-counterfeit currency propaganda, and agency purchase of train tickets.

6.2 Innovation of Inclusive Financial Products 6.2.1 Credit Procedures 6.2.1.1

Expand the Scope of Guarantees and Collateral

One important factor limiting the availability of financing for inclusive finance is the lack of qualified collateral. To address this problem, financial institutions, with the support of the national policy, have launched a series of innovations to expand the scope of pledges. (a) Financing of rural property rights In consideration of the nature of land ownership, agricultural land and housing owned by rural residents are excluded from collateral to apply for loans from banks. Since the Third Plenary Session of the 18th Central Committee of the CPC, the pilot of “two rights” (rural land contract management rights and farmers’ housing property rights) mortgage loans has been launched. It is an important innovation of China’s rural financial system, which is of great significance in revitalizing rural stock assets, optimizing the efficiency of rural land utilization, and facilitating the development of rural economy and rural finance. In 2016, 232 pilot counties (cities and districts) of farmland mortgage loans and 59 pilot counties (cities and districts) of farmhouse mortgage loans were identified by People’s Bank of China in conjunction with relevant departments in China, while a special statistical system of “two rights” mortgage loans was established. 4

China Rural Finance Service Report 2020.

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In the pilot areas, various means such as the setup of risk compensation funds and establishment of governmental agricultural guarantee companies were used to share the risk of “two rights” mortgage loans. To meet the financing needs of production and operation subjects, financial institutions have launched various credit products such as “two rights + third-party guarantee,” combined mortgage of rural multi-property rights, and small guaranteed insurance loans for farm buildings. As of the end of September 2018, 1,193 financial institutions have commenced farmland mortgage loan business and 330 financial institutions have commenced farmhouse mortgage loan business in the pilot areas. The national balance of farmland mortgage loans was RMB 52 billion, with a total of RMB 96.4 billion disbursed. The balance of farmhouse mortgage loans was RMB 29.2 billion, with a total disbursement of RMB 51.6 billion.5 (b) Chattel and rights financing With regard to the characteristics and needs of the rural economy and small and micro-sized enterprises, financial institutions have been exploring the possibility of including large agricultural machinery, live animals and poultry, agricultural production facilities, machinery and equipment, inventory, accounts receivable, trademark rights and patent rights in the range of collateral and developing related credit products. The movable resources of farmers and small and micro-sized enterprises have been effectively revitalized thanks to the infrastructure based on the chattel financing registration and public display system and the receivables financing service platform. As of the end of 2020, 39,000 users of various types of registrations, including national banks, rural credit cooperatives and rural banks, have been registered in the chattel financing registration system, with 8.616 million registrations recorded. A total of 325,000 registered users of the accounts receivable financing service platform have contributed to 263,000 financing transactions, amounting to RMB 13.3 trillion.6

6.2.1.2

Vigorously Develop Unsecured Loans

As digital technology has been developed and applied and the credit information system in rural areas and small and micro-sized enterprises has been continuously upgraded, the reliance of financial institutions on collateral has been gradually weakened and “unsecured and uncovered” micro-credit loans have been developed. Some representative practices are described below.

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Data source: Summary Report of the State Council on the National Pilot Program of Mortgage Loans for Management Rights of Contracted Rural Land and Property Rights of Farmers’ Housing, 7th Meeting of the Standing Committee of the 13th National People’s Congress, December 23, 2018. 6 Data source: China Rural Finance Service Report 2020.

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(a) Poverty alleviation microfinance As an innovative product in China’s financial poverty alleviation, since its launch in 2015, poverty alleviation microfinance has played a positive role in solving the difficulties of poor households in obtaining loans and helping them develop production and increase their income to lift them out of poverty. It has some features. First, there is a wide range with great volume. It is applicable to poor households with loan needs and certain labor capacity in the country. The issuance of poverty alleviation microfinance is undertaken by a certain accountable bank in the township, and the bank is responsible to manage poor households recorded according to the list system. Second, it has specific targets. The targets are the poor households recorded with cards, who must comply with the law, be honest and trustworthy, have no major bad credit records and full civil capacity. They should pass the bank’s credit rating, be willing to obtain a loan, and have the necessary skills and ability to repay the loan. Third, the process is simple. As long as the target is a poor household who are qualified to record the card, it will be directly available to apply for a loan. The application process for poverty alleviation microfinance is in general a “five-step process” (household application, village preliminary examination, township audit, county review, bank validation) for a loan, with no guarantee or collateral required. Fourth, the credit loan is favorable. The interest during the loan period is borne by the government treasury, for which the poor households are only required to repay the principal at maturity. Fifth, such load shall be used only for specialized purposes. It shall only be applied by poor households to develop production or industries with special advantages that can effectively drive poor households out of poverty, and shall not be used for non-productive expenditures such as building houses, managing finances, and purchasing household goods. Sixth, there is a risk control. Governments at all levels allocate risk compensation funds for dedicated use with closed operation, and the clear risk-sharing ratio between governments and banks is clearly identified. In practice, innovative exploration has been carried out by some regions in key areas such as credit evaluation and risk prevention and control, which promoted the sustainable development of poverty alleviation microfinance (Box 6.2). Box 6.2 The “721” Credit Rating System for Poverty Alleviation Microfinance in Mayang County, Hunan Province7 The traditional way of credit rating is that the bank assesses the credit rating of the borrower after a comprehensive examination and analysis of items including

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Data source: Consolidate the Practice Achievements of Poverty Eradication with Finance, China Financial Publishing House, 2020.

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financial status, production and operation, loan usage, ability to repay the loan and loan proceeds, and then grants credit according to the credit rating. Due to the poor economic status of poor households, they cannot be effectively rated and granted credit according to the traditional credit rating method of banks. Banks, therefore, have difficulties in determining the credit limit of the loan, and with concerns about risk, are in turn unwilling to approve the loan application. In order to address this issue, the “721” credit rating system has been introduced for poor households in Mayang County, Hunan Province, based on personal credit, which has transformed the credit rating from attaching importance to “family assets” to “credit assets”. The personal credit evaluation of poor households from villagers is transformed into quantitative rating indicators for bank credit, which effectively solves the problem of difficulties in rating and granting credit to poor households and high potential risks. 1. Innovation of the “721 Credit Rating” system According to the three indicators of “integrity evaluation,” “labor force,” and “household income” of poor households, Mayang County has created the “721 Credit Rating” system by assessing the credit rating and credit limit. In the credit rating system with 100 points, “integrity evaluation” accounts for 70 points, “labor force” accounts for 20 points and “per capita net income” accounts for 10 points, and the three indicators are quantified and scored separately. The rating of each item is divided into A, B, C three grades. If the total score of the three indicators is more than or equal to 90 points, the credit limit is RMB 50,000. If the total score of the three indicators is more than or equal to 80 points, the credit limit is RMB 30,000. If the total score of the three indicators is more than or equal to 70 points, the credit limit is RMB 10,000. If the total score of the three indicators is less than 70 points, the credit will not be granted. According to the scoring standard, even if a poor household fails to score on “labor force” and “per capita income,” as long as it has good credit in “integrity evaluation” (70 points), it is still possible to obtain the poverty alleviation microfinance with RMB 10,000. 2. The credit is reviewed at each level after the credit rating of village representatives The credit status of individual farmers is best known to their village officials and neighbors. Mayang insists on “one evaluation for one household” at the village level, with village representatives, village officials, poverty alleviation officials and branch bank presidents of agricultural commercial banks forming the “village credit rating group” for preliminary examination, and the county rural commercial bank branches and head office for examination and determination of credit rating.

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3. Set up risk compensation and introduce insurance products The risk compensation fund was provided by Mayang County with the support of county finance. Based on the amount of risk compensation, banks release loans at a ratio of 1:10. The size of the risk compensation fund grows flexibly at a rate of 10% of the banks’ loan balance. In Mayang County, borrower’s accident insurance and agricultural insurance are also introduced to spread the risk of loans, solving the problem of “daring to lend” of banks. 4. Strengthen loan recovery and build credit information system For the purpose of the recovery of loans based on credit ratings, Mayang County has established a rural credit information platform and improved the credit information sharing mechanism for poor households. And a financial poverty alleviation service center has been established to be responsible for clearing non-performing loans and ensuring the healthy operation of credit funds. Any township or village where the recovery rate of loans due within the year is less than 98% for three consecutive months, Mayang County will stop the loan business, organize the clearance after risk compensation, and continue to lend after being qualified. It severely cracked down on malicious loan evasion and loan repudiation to promote a healthy credit environment. By the end of 2019, 5,295 poverty alleviation microfinances of RMB 255.8 million had been issued in Mayang county. The cumulative matured loans amounted to 3,024 pieces of RMB 145,557,800. The recovery of matured loans amounted to RMB 145,557,800 for 3,024 pieces. No overdue loan occurred and the recovery rate of matured loans was 100%. It had helped 5,295 poor households to develop special planting industries of more than 300,000 mu and breeding industries of more than 300,000 feathers (heads), with an average household income increase of RMB 16,000.

(b) Inclusive loans for farmers In response to the lack of guarantee security and difficulty of loans for farmers, some regions have innovated to introduce a small inclusive loan with pure credit, wide coverage and low threshold. For example, Zhejiang Province has achieved full coverage of rural inclusive credit rating. Financial institutions take the initiative to collect basic identity information such as the name, ID card number and contact information of farmers. It is convenient for farmers to obtain a basic credit limit of RMB 30,000 or more without a need to provide materials or fill out various forms. The basic credit rating is eliminated for people on the negative list of bad social behavior. Based on the platforms of big data center, contracted land confirmation, forest rights, and premises information system, accurate credit increase and credit limit enhancement are offered based on the measurement results obtained from the implementation of standardized information collection and establishment of preliminary credit rating data model. If a farmer’s current credit limit fails to meet his or

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her demand, he or she may apply for a limit increase at any time through online and offline channels, up to a maximum of RMB 300,000. It is possible to conduct all the processes such as farmer information collection, credit rating completion, precredit signing and on-demand use of funds online through the mobile phone APP. The bank’s big data system is used to continuously monitor farmers’ loan repayments and regularly compare information with data from the public prosecution and law system. If a credited farmer deliberately defaults on loans, violates the law and commits other undesirable acts, the credit limit will be cleared in a timely manner and listed on the blacklist for dishonesty. By the end of 2020, there were 2.99 million credit-using farmers in the province, accounting for 33% of the number of credit rating households, with a total credit amount of RMB 589.6 billion.8 (c) Loans for small and micro-sized enterprises Several commercial banks have developed pure credit and online financial products to alleviate the financing difficulties of small- and micro-sized enterprises due to the lack of guarantee security. With the integration of external data such as tax, customs and electricity, the entire process can be made online. For example, with the help of big data and internet technology, ICBC has launched the “Business Express Loan” series of pure credit, online and broad-coverage credit-based loans by mining multidimensional data such as transaction, settlement, tax, asset and credit reference to provide small- and micro-sized enterprises with an accurate portrait. More than 300 scenes are covered, including anti-epidemic and start-up. By the end of 2020, it has provided more than 1.1 million small and micro-sized enterprises with credit-based credit rating of more than RMB 850 billion and a balance of more than RMB 100 billion.9

6.2.1.3

Supply Chain Financing

Based on the whole supply chain industry chain, supply chain financing applies fintech to integrate logistics, capital flow, information flow and other information to build an integrated financial supply system and risk assessment system between the dominant core enterprises in the supply chain and upstream and downstream enterprises in the context of real transactions, to provide systematic financing solutions, reduce enterprise costs and enhance the value of all parties in the industry chain. Internet, IoT, big data, cloud computing and other technologies are used by commercial banks to innovate supply chain financial services. With the technology of blockchain and IoT, ICBC has formed three scenarios of digital supply chain product system, namely, vertical chain, transaction chain and data chain, which has implemented more than 1,700 digital supply chains. Based on technological empowerment, China Construction Bank has provided zero-touch and zero-distance 8

Data source: China Rural Finance Service Report 2020. Data source: Report on Financial Services for Small- and Micro-sized Enterprises in China 2019– 2020, China Financial Publishing House.

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supply chain online financial services. In 2020, it provided support to more than 65,000 chain enterprises of nearly 3,700 core enterprises with over RMB 560 billion of supply chain financing, of which 90% small, medium- and micro-sized enterprises.10 The following are its specific measures. First, build an open platform to widely connect data, comprehensively share “logistics, capital flow and information flow,” and provide one-stop comprehensive services for core enterprises and their chain enterprises. Second, use the internet online service model to ensure a full time online and provide convenient and efficient services. Third, consider the characteristics of different industry chains to customize the whole chain and the whole scene of financial service solutions. Fourth, apply big data, AI, and other technologies intelligent risk control to achieve digital risk research and judgment, digital risk warning.

6.2.2 Direct Financing Products Multi-level listing and financing services are provided by the stock market for enterprises of different sizes and types through the Main Board, STAR Market, NEEQ and regional equity exchange markets. Debt financing channels are provided by the bond market with enterprise bonds, corporate bonds, and various types of debt financing instruments (medium-term notes, short-term financing bonds, and ultrashort-term financing bonds) for agriculture-related enterprises and various types of small-, medium- and micro-sized enterprises. The innovative practice of direct financing products, either directly oriented to financing entities (e.g., innovation and entrepreneurship bonds) or to commercial banks (e.g., special financial bonds, loan asset-backed securities), to enhance their inclusive financial service capability by broadening the source of funds.

6.2.2.1

Special Debt Financing Instrument for Innovation and Entrepreneurship

The special debt financing instrument for innovation and entrepreneurship is a new attempt to support the development of innovation and entrepreneurship enterprises and innovative financial service model in the interbank market. On April 25, 2017, the first batch of special debt financing instrument for innovation and entrepreneurship were successfully registered with the Exchange Traders Association. As of the end of 2020, RMB 64.47 billion of special debt financing instruments for innovation and entrepreneurship has been issued, which provided financial support to 340 private and small, medium, and micro science and technology innovation enterprises.

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Data source: Report on Financial Services for Small and Micro-sized Enterprises in China 2019– 2020, China Financial Publishing House.

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The purpose of special debt financing instrument for innovation and entrepreneurship is to provide funds to meet the financing needs of science and technology innovation enterprises. Among the issuers, most of which are park operating enterprises, entity industrial groups, state-owned capital investment and operation companies, enterprise demonstration bases, and other enterprises that carry out equity investment or asset management business with good profitability and debt servicing capability. The funds raised are available to directly support the development of science and technology innovative enterprises in the model of “combined investment and debt repayment”, which may be employed for conventional purposes such as repayment of bank loans and infrastructure construction of the park, as well as support the development of innovation and entrepreneurship enterprises in the form of equity investment, thereby effectively reducing the entrepreneurial risks and innovation costs of enterprises and providing diversified support for the development of innovation and entrepreneurship enterprises.

6.2.2.2

Poverty Alleviation Notes

The National Association of Financial Market Institutional Investors (NAFMII) has organized market members to seek to establish market-oriented financing channels for poverty alleviation, innovate and launch poverty alleviation notes, and promote the organic combination and mutual promotion of poverty eradication and rural revitalization. Poverty alleviation notes are the debt financing instruments with a special logo in which the issuers uses a certain percentage of the proceeds for precise poverty alleviation. The first batch of poverty alleviation notes were issued and implemented in March 2017. As of the end of 2020, RMB 50.42 billion of poverty alleviation notes were issued by 35 enterprises in 20 provinces (autonomous regions and municipalities directly under the central government).11 The funds raised were mainly applied to targeted poverty alleviation projects such as industrial development and infrastructure construction in poverty-stricken areas, to promote poverty alleviation work in more than 100 poor counties.

6.2.2.3

Special Financial Bonds

With a view to enhancing the ability of commercial banks to make inclusive loans and expanding the sources of credit funds, regulatory authorities have encouraged qualified commercial banks to issue bonds in the national inter-bank bond market to raise special funds for the issuance of loans to the three agricultures and small and micro-sized enterprises.

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Data source: China Rural Finance Service Report 2020.

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(a) Special financial bonds for the three agricultures The funds raised by special financial bond for the three agricultures issued by commercial banks are specifically used to issue loans related to agriculture. In September 2013, the China Banking Regulatory Commission announced the entry requirements and supervisory measures for commercial banks to apply for the issuance of special financial bonds for the three agricultures. On September 30, 2014, the first special financial bond for the three agricultures was issued, whereby Bank of Suzhou successfully raised RMB 2 billion in the inter-bank bond market. In particular, the 3-year bond was RMB 1 billion with an issue rate of 5.20% and was subscribed 2.08 times, while the 5-year bond was RMB 1 billion with an issue rate of 5.43% and was subscribed 1.65 times. Rural commercial banks and some urban commercial banks are the main issuers of special financial bonds for the three agricultures.” (b) Special financial bonds for small and micro-sized enterprises Special financial bonds for small and micro-sized enterprises are issued by commercial banks which raise funds for the specific target clients of small- and micro-sized enterprises as well as poor or middle-low income groups, and specifically for issuing loans to small- and micro-sized enterprises. There is no need for collateral, and issuers may decide the time of financing independently, with a flexible issuance method, which has played an important role in broadening the financing channels of smalland micro-sized enterprises since its launch in 2011. By the end of 2018, the cumulative issuance of special financial bonds for small- and micro-sized enterprises was RMB 719 billion. In response to the impact of the COVID-19 pandemic, the issuance of special financial bonds for small- and micro-sized enterprises was increased in 2020. Forty banks have issued 51 small and micro-sized financial bonds throughout the year, with an issue volume of RMB 373.28 billion, up 82% year-on-year.12 On the one hand, the issuance of small and micro-sized financial bonds broadened the supplementary channels of bank funds and actively provided relief to small and micro-sized enterprises. On the other hand, the funding pressure of the banks was relieved and the funding cost of deposit collection was reduced. The issuance of special financial bonds for small and micro-sized enterprises by urban commercial banks will be helpful to solve the problems of their single source of liabilities and weak deposit-deriving ability of small and micro-sized clients, effectively alleviate the mismatch between the maturity of asset and liability business, and enhance the asset and liability management ability of urban commercial banks. For example, Zhejiang Mintai Bank has issued RMB 10.5 billion in special financial bonds for small- and micro-sized enterprises in the interbank market from 2013 to 2018, and all 12

Data source: Edited by the People’s Bank of China and the CBIRC: Report on Financial Services for Small- and Micro-sized Enterprises in China 2018, Report on Financial Services for Small- and Micro-sized Enterprises in China 2019–2020, China Financial Publishing House.

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the funds raised were used for credit allocation to small- and micro-sized enterprises. The average loan balance of small- and micro-sized enterprise households in the bank was RMB 350,000. The balance of small- and micro-sized enterprise loans accounted for more than 65% of the total loan balance. The percentage of small- and microsized enterprise franchise branches and community branches exceeded 50%. And the loan application approval rate for small- and micro-sized enterprises reached 90%. Micro loan turnover business was completed within 1 day, while the new business only took 3–5 days to complete.13

6.2.2.4

Government Investment Fund

Government investment funds are funds set up by governments at all levels through budgetary arrangements, with separate funding or jointly with social capital, by using equity investment and other market-oriented methods to guide all types of social capital to invest in key areas of economic and social development and weak links to support the development of relevant industries and fields. In recent years, a large scale of government investment funds approved by governments at all levels has been developed, which has played an important role in innovating the use of financial funds, guiding the development of new industries and leveraging social capital investment. (a) China Small and Medium-Sized Enterprises Development Fund In 2020, the central government and social investors, in accordance with the relevant requirements of the Law of the People’s Republic of China on Promotion of Small and Medium-sized Enterprises, jointly initiated the establishment of the National Smalland Medium-sized Enterprises Development Fund Limited (FOF) with a registered capital of RMB 35.75 billion. The purpose of the FOF is to play the leading role of financial funds to attract and drive social capital to jointly expand the scale of equity investment in SMEs and promote the innovative development of SMEs. As of the end of 2020, the total scale of the FOF and the subfund of the National Small- and Medium-sized Enterprises Development Fund was RMB 60.65 billion. There were 6 direct investment subfunds of the FOF operating with external investment. The total number of investment projects completed by the subfund was 420, with a total investment amount of RMB 13.66 billion. The Fund has participated in more than 400 venture capital funds and has supported more than 6,000 innovative enterprises. (b) Seed Development Fund In 2013, a modern Seed Development Fund was sponsored by the Ministry of Finance of the People’s Republic of China, together with the Ministry of Agriculture, the Agricultural Development Bank of China and the Sinochem Group, which is the first seed industry fund with government background and market-oriented operation in China. The term of the fund is 10 years, with an initial amount of RMB 1.5 13

Data source: Edited by the People’s Bank of China and the CBIRC: Report on Financial Services for Small- and Micro-sized Enterprises in China 2018, China Financial Publishing House.

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billion, contributed by the Ministry of Finance of the People’s Republic of China, the Agricultural Development Bank of China and the the Sinochem Group with a capital of RMB 500 million respectively, which aims to make equity investments in high-growth seed enterprises and provide policy consultation and other services to the enterprises. The fund mainly supports seed enterprises with breeding capacity, high market share and large scale of operation, so as to promote the improvement of breeding capacity, production and processing technology level and marketing capacity of seed enterprises, and further enhance the overall development of seed enterprises. A close strategic partnership has been established between the Seed Development Fund and large seed enterprises, seed and agricultural listed enterprises, core research institutes, financial institutions, etc., which vigorously serves the transformation of scientific research results and drives other social capital of more than RMB 10 billion to invest in the seed industry.

6.2.3 Insurance Product 6.2.3.1

Agriculture Insurance

Agriculture insurance in China sticks to the principles of “government guidance, market operation, voluntary application and collaborative promotion”, namely that the government lead farmers to buy insurance and encourage insurance institutions to underwrite through premium subsidy, tax incentive and other support policies (Fig. 6.2). From 2007 to 2021, the subject matter of agriculture insurance has expanded from the initial five plantation crops to 16 bulk agricultural products and local advantageous and special agricultural products such as plantation, breeding and forestry, and more than 270 varieties of crops were covered by the national agriculture insurance. The agricultural production fields of agriculture, forestry, animal husbandry and fishery have been covered with products and services, and the agriculture insurance is gradually expanding to rural housing, agricultural machinery and agricultural facilities and other agriculture-related fields. The agriculture insurance has covered all provinces (autonomous regions and municipalities directly under the central government) in China, and the coverage rate of the three major staple grains of rice, wheat and corn is close to 70%. In addition to the traditional cost insurance, price insurance, income insurance, index insurance, liability insurance, “insurance + futures” and other innovative products have been launched (Box 6.3). The agriculture insurance is gradually transformed from insuring disasters and costs to insuring prices and incomes, and upgraded from insuring production links to insuring the whole industry chain.

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Fig. 6.2 Income from agriculture insurance premiums (RMB billion). Data Source China Rural Finance Service Report in previous years

Box 6.3 Forest Insurance The subsidy policy for forest insurance premiums of the central government was officially launched in three pilot provinces in 2009, and the policy coverage was expanded to 26 provinces (autonomous regions and municipalities directly under the central government) by the end of 2020. As of the end of 2020, the total area covered by forest insurance in the country has reached 2.437 billion mu, about 12 times the 203 million mu in 2009 when the pilot was launched. The risk coverage capacity of forest insurance increased 15-fold from RMB 97.4 billion in 2009 to RMB 1,588.3 billion. The risk coverage provided by forest insurance accounted for nearly 20% of the total output value of the forestry industry. The insured subjects range from forest farmers, family forestry farms, forestry cooperatives, forestry enterprises, forest parks, nature reserves and state-owned forestry farms to almost all types of forestry production and management subjects. From 2009 to 2020, the claims paid by forest insurance were RMB 7.798 billion, which effectively played the role of post-disaster compensation. The scale of Chinese forest insurance has ranked top in the world. New forest insurance products, technologies and mechanisms are emerging along with the rapid development of information technology such as IoT, blockchain and big data. The first is the increasing abundance of economic forest insurance and index-based insurance products. The oil tea forest weather index insurance and tea income insurance were launched in Hunan Province. Insurance for kiwi trees, chestnut trees, walnut trees, and oil tea income insurance were introduced in the Guangxi Zhuang Autonomous Region. Zhejiang

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Province has piloted the first high temperature and drought weather index insurance for botany in China. The second is the insurance connotation is constantly enriched and expanded to the whole industry chain of forestry and grass. With the introduction of the wildlife accident compensation system in Yunnan Province and Tibet Autonomous Region, the insurance of public liability for wildlife accidents has covered the whole province. The pilot projects of policybased natural grassland insurance supported by local finance have been carried out in Sichuan Province and Inner Mongolia Autonomous Region respectively to provide risk protection for grassland drought, pest and rodent damage, sandstorm disasters, fires, etc. The third is that insurance agencies actively apply modern information means and technology to the whole process of forest insurance, which makes the service more scientific, convenient and efficient. CPIC Properties and Casualty Insurance has developed the “e-Agriculture Insurance” digital operation and management platform cluster to accelerate the speed and improve the accuracy of catastrophe claims settlement. By applying “remote sensing + drone” technology, Anhua Agricultural Insurance continuously monitored the situation of pine caterpillar disaster in Jilin Province and carried out timely investigation and claim settlement.

6.2.3.2

Personal Health Insurance

Illness and unintentional injuries are identified as a significant cause of uncertainty in spending for the vulnerable groups. In accordance with the guidance of government departments, insurance companies have developed relevant products to help the vulnerable groups improve their ability to withstand risks. (a) Small amount life insurance Small amount life insurance is a collective name for a class of life insurance products for low-income people, with low premiums, moderate security, commonplace policies, and simple underwriting and claims processing. In 2008, rural small amount of life insurance was piloted in some areas, which encourage eligible insurance companies to launch life insurance products between RMB 10,000 and RMB 50,000 with rural low-income groups as the main target market. For example, in accordance with the principle of “moderate protection, low premiums and simple procedures”, the People’s Insurance Group has developed rural small amount life insurance for farmers to protect against accidents and medical liabilities, so that it is affordable, trustworthy and useful for farmers. As of the end of 2014, the rural small amount insurance business of the company has covered 20 provinces (autonomous regions and municipalities directly under the Central Government), with a total premium

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income of RMB 111 million and a payout of RMB 35 million, serving more than six million people.14 (b) Inclusive medical insurance As a supplemental medical insurance product, it is guided by local governments and relevant departments, commercially operated by insurance companies, and connected with basic medical insurance, which has three major features: inexpensive premiums, low purchase thresholds, and high coverage amounts. In 2020, 179 municipalities of 82 regions in 23 provinces introduced such insurance, with a cumulative total of over 40 million participants and premium income of over RMB 5 billion.15 The insurance amount of the products in various regions is more than RMB 1 million, mostly in the range of RMB 1–3 million, and the reimbursement rate is usually 70–80%. It is possible to be insured if the insured is covered by basic health insurance. Usually, there is no age limit and the health notification is more relaxed. With an attitude of preserving cost and making a little profit, insurance companies generally charge a premium of about RMB 100. At an affordable cost to the modest economy, these products provide appropriate services to groups with health protection needs, which significantly expands the coverage of traditional commercial health insurance.

6.2.3.3

Financing Credit Guarantee Insurance

Guarantee insurance allows the transmission of the risk of the insured. As an insurance instrument, it is a financial compensation system to spread risks and absorb losses. Among which, loan guarantee insurance serves to enhance the credit of the main body of inclusive financial services and alleviate the problem of lack of collateral and credit deficiency. In 2009, a micro loan guarantee insurance was launched in Ningbo City, which achieved positive results and its experience was promoted in the country (Box 6.4). Box 6.4 Ningbo Micro Loan Guarantee Insurance In September 2009, micro loan guarantee insurance (“micro loan insurance”) was launched in Ningbo City. By the end of August 2022, the micro loan insurance has provided unsecured loans of RMB 36.69 billion to more than 110,000 small and micro-sized enterprises, urban and rural entrepreneurs, and agricultural farmers in the form of unsecured and uncovered loans. In Ningbo, the micro loan insurance mainly serves to provide support to agricultural farmers (including rural economic cooperatives), small- and microsized enterprises and urban and rural entrepreneurs. The funds obtained from the loan shall only be used for production and business purposes, and shall not

14

Data source: China Rural Finance Service Report 2014. Data source: Edited by Bei Duoguang, New Start—Building an Inclusive Financial Ecosystem, China Financial Publishing House, 2022.

15

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be used for consumption or other purposes. If the natural or legal person who obtained the loan fails to fulfill the obligation to repay the interest stipulated in the Loan Contract completely for three consecutive months, or if the insurance applicant still fails to fulfill the obligation to repay the loan principal 30 days after the expiration of the Loan Contract, the insurance company shall compensate the remaining loan principal to the bank that issued the loan in accordance with the insurance contract. The borrower is the insurance applicant and the bank is the insured. Micro loan insurance is a kind of financing credit insurance, in which insurance applicants may apply for micro loans from banks without additional collateral or guarantee by taking out micro loan insurance from insurance companies. If the insurance applicant fails to perform the repayment obligation on time, the insurance company is responsible for indemnifying the bank for the unpaid principal amount of the loan and the corresponding interest pursuant to the relevant agreement. The base rate for natural persons is 2.4% and for legal entities is 2.5%, and the base rate was reduced to 1.8% from the beginning of 2011. The maximum insurance term is one year. There are measures to prevent risks in six aspects. First, control the amount and scale of loans. The loan amount for a single household is initially classified into three classes of RMB 300,000, RMB 100,000 and RMB 1 million depending on the risk level of the borrower, and is adjusted to RMB 500,000, RMB 1 million and RMB 3 million in 2011 and again to no more than RMB 5 million in 2021. Second, risk sharing between banks and insurance institutions and government overcompensation funds. At the beginning, a risk fund of RMB 10 million was established by the municipal government to compensate insurance agencies for claims that exceed a certain percentage. The risk of loans is shared between banks and insurance institutions in the ratio of 3:7, which is adjusted to a risk-sharing ratio of not less than 20% for banks in 2021. Third, the mechanism of underwriting decisions and loan risk cease. The insurance agency has a veto on lending and can cease this business if the loan is 10% overdue or the payout rate exceeds 150%. Fourth, the borrower default disciplinary mechanism and arrears recovery mechanism. The default information and the list of defaulters would be registered in the credit reference system of the People’s Bank of China. A “green channel” to intensify the fight has been created by judicial organs, which is applicable to simple procedures and priority implementation Public security departments will promptly file and investigate the borrower’s malicious and fraudulent lending behavior and pursued criminal responsibility according to law. Fifth, the co-insurance body will be jointly formed by PICC and CPIC Ningbo Branch, which will share the corresponding business responsibilities at a ratio of 6:4. An operation team is set up in the co-insurance body, which has specialized in the management of the franchise and adopts the operation model of independent accounting, closed operation, unified acceptance and centralized office. Sixth, the establishment

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of post-loan risk tracking mechanism. The Risk Management Department was established to enhance the tracking of fund utilization and prevent risks timely by adopting graded risk monitoring means. There is a distinctive universal character to micro loan insurance. First, small and micro-sized enterprises, agricultural breeders, and urban and rural entrepreneurs—the three groups with the most urgent capital needs and the most lack of financing channels—are selected as the targets for protection with a maximum support loan amount of RMB 5 million. Second, it highlights the characteristics of unsecured, uncovered, and small amount of low rate, and the financing cost is the insurance rate coupled with the loan interest rate, with an average annualized cost of about 8%, which is significantly lower than the financing cost of enterprises in other channels such as micro-credit companies and guarantee companies. Third, it is convenient and fast, which is in line with the characteristics of “service availability” emphasized by inclusive finance. Banks and insurance institutions work together seamlessly in business acceptance, due diligence, risk review and arrears recovery. The loan subject may obtain a loan within five working days by submitting a one-time application to the bank or insurance institution.

6.2.3.4

Comprehensive Insurance Products

Based on multiple scenarios including rural social life and agricultural industry operation, some insurance companies have launched comprehensive insurance solutions with personalized integration of nearly 100 agriculture-related insurance products. For example, the “Rural Revitalization Insurance Service Program” of the People’s Insurance Company of China covers various fields including agricultural production, rural infrastructure, rural life, agricultural industry operation, rural security management, rural finance and credit. In terms of the way to insure, a uniform menu is presented to clients. By simply checking the terms and conditions of the policy and filling in the corresponding information, an insurance application form is easily purchased for multiple types of insurance at one time to meet the comprehensive protection needs. In 2021, it provided risk coverage totalling RMB 47 trillion for 200 million farm households.16

16

Data source: Zhang (2022).

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6.2.4 Collaborative Innovation 6.2.4.1

Insurance + Futures

The basic principle of the “insurance + futures” model is described as follows. Based on the corresponding futures prices (or spot prices) of agricultural products in the futures market, an agricultural price insurance is developed by insurance companies. The farmers or agribusinesses will purchase the agricultural price insurance from the insurance companies to protect their earnings. Insurance companies will purchase Over-the-Counter (OTC) option products from the risk management subsidiaries of futures companies for reinsurance to hedge against the potential risk of a decline in agricultural prices With the corresponding hedging operations in the futures exchange, the risk management subsidiary of the futures company will further diversify the risk, thus ultimately forming a closed loop of risk diversification and benefit to all parties. Since the first “insurance + future’s” pilot in 2015, relevant parties have actively participated in the pilot promotion, in which the number of insurance companies and futures companies have gradually increased, and the pilot varieties, scale and scope have expanded year by year. As of December 31, 2020, a total of 62 “insurance + future’s” projects have been carried out, ranging from corn, soybeans, soybean meal, eggs, apples, cotton, dates, sugar, natural rubber to other varieties, with a nominal principal amount of about RMB 18.826 billion.17 While the pilot project is advancing, the business model based on this has been continuously optimized, and subjects at all levels of the industry chain have been introduced, ranging from single price insurance to income insurance combining price and yield, and then to new models like “insurance + futures + order agriculture” and “insurance + futures + bank (credit)” in which subjects of the whole industry chain participate (Box 6.5). Box 6.5 The First Apple “Insurance + Futures” Project In December 2017, the apple futures product, the world’s first fresh fruit futures, was listed on the Zhengzhou Commodity Exchange. On the first day of listing, Huaxin Futures and PICC Shaanxi Province jointly signed the first apple “insurance + futures” project in China. For this project, the insured farmers will purchase apple price insurance from PICC Shaanxi Branch with subsidies from Huaxin Futures. The PICC Shaanxi Branch purchased apple put options from the risk management company of Huaxin Futures, that is, Huaxin Estate Co. Ltd. Shanghai Office (hereinafter referred to as Huaxin) to transfer pricing risk. In turn, Huaxin transfers the risk to the futures market by replicating the option. The project is designed with American options. The insured farmers may choose to exercise their rights at any time before the expiration date of March 9, 2018, which confers a large

17

Data source: Yu (2022).

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degree of autonomy to the insured parties. The project provides price guarantees for 100 tons of apples with a target price of RMB 8600/ton. In case the market price is lower than the target price, the insured farmer will be compensated for the difference in price. Since its introduction, the futures price has experienced a brief surge upward and then gradually declined. During the Spring Festival in 2018, there were bearish expectations in the market due to slower-than-usual shipments from apple-producing regions. On January 19, 2018, 26 insured farmers in Yijun County, Shaanxi Province, opted to settle at a price of RMB 7,660/ton. They received RMB 94,000 worth of claims on February 8, which hedged the risk of a price drop of RMB 940 per ton of apples.

6.2.4.2

Bank + Insurance + Guarantee

Poor credit information, unstable production and operation, and relatively high credit risks usually occur among the three-agricultures, small and micro-sized enterprises, and other inclusive financial service targets, which to a certain extent affects the willingness of financial institutions to lend. With the introduction of guarantees, insurance, and other products a risk-sharing and credit enhancement mechanism is established, which will effectively reduce the risks and losses of bank credit and improve the availability of inclusive financing. As a matter of practice, various forms of risk-sharing mechanisms such as “bank + insurance” “bank + guarantee” and “bank + insurance + guarantee” have been developed. For example, a risk-sharing mechanism involving banks, risk compensation funds, insurance and guarantees, calculated in segments, is established for the inclusive credit business in Lankao County, Henan Province. That is, the risk is divided into four segments: less than 2%, 2–5%, 5–10%, and more than 10%. If the NPL ratio is ≤2%, the loss will be fully borne by the host bank. If the NPL ratio exceeds 2%, the losses will be borne by the banks, the risk compensation fund established by the government, the insurance company and the guarantee company. While the proportion of government risk compensation increases with the rise of the non-performing rate, the proportion of banks’ share decreases with the rise of the non-performing rate. With this mechanism design, the local government’s responsibility for optimizing the credit environment has been consolidated, which also relieves the banks of their worries in carrying out inclusive credit rating.

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6.3 Digital Inclusive Financial Development The development of inclusive finance has been effectively enhanced by the development of digital technology at both the breadth and depth levels by reducing financial transaction costs and improving the efficiency of financial services. An important priority is placed by the Chinese government on the use of digital technology to promote the development of inclusive finance. The “Planning of Promoting the Development of Inclusive Finance (2016–2020)” refers to the intention that it will actively guide all kinds of service providers of inclusive finance to reduce financial transaction costs, extend service radius and expand the breadth and depth of inclusive financial services by means of modern information technology such as the internet. In 2016, China served as the G20 Presidency and promoted the approval of the “G20 High-Level Principles for Digital Financial Inclusion” at the G20 Leaders’ Summit in Hangzhou. In the “Emerging Policy Approaches to Advance Digital Financial Inclusion” released in 2017, five cases from China were selected.18 The term “digital inclusive finance” is defined as any action that promotes financial inclusion through the use of digital financial services, according to the G20 highlevel Principles for Digital financial inclusion. It includes the application of digital technology to provide a range of formal financial services to groups that do not have access to financial services or lack them. The financial services provided by it will meet their needs and be delivered in a way that is responsible, affordable, and sustainable for the service provider. In particular, “digital inclusive finance” is a category of financial products and services (such as payments, transfers, savings, credit, insurance, securities, financial planning and bank statement services) that are transacted through digital or electronic technologies, such as e-money (initiated online or by mobile phone), payment cards and regular bank accounts. In comparison with the United States and Europe, there are three characteristics of digital finance development in China.19 First, the leading digital finance businesses in China are mobile payments, online loans, digital insurance and online investments. There are few cryptocurrency and cross-border payment operations due to concerns about money laundering and financial stability. Second, the digital finance sector is dominated by large technology companies.20 With the representative of “BATJ,” the internet giants have entered the digital finance field earlier and have a more comprehensive layout. At the same time, with the advantage of their own technology, traffic, users, data, brand, etc., digital finance platform ecology has been rapidly built, and their respective digital finance unicorns are becoming stronger. Third, the development of digital finance is characterized by the significant feature of promoting financial inclusion. With mobile payment, mobile banking and online credit, the 18

Five cases in China: issuing guidance on internet finance; categorizing and regulating payment accounts; establishing a self-regulatory association for the internet finance industry; improving the payment infrastructure; and establishing a sound credit reference system. 19 Huang and Tao (2019). 20 BATJ is the abbreviation for the four major Chinese internet companies Baidu, Alibaba, Tencent and Jingdong.

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radiation of China’s financial services has been expanded to provide financial services to groups in backward and remote areas, where they may enjoy financial services such as payment, bill payment, deposit and loan in a lower cost and more convenient form. Currently, the development of digital finance in China is a relative leader in the world. According to the Fintech 100: The World’s leading fintech innovators, released by KPMG and H2Ventures, among the top 12 in 2019, four seats were taken by China’s Ant Financial Services Group, JD Digital Technology, Du Xiaoman Financial and Shanghai Lujiazui International Financial Asset Exchange.

6.3.1 Online Payment21 The first and most widespread application of digital finance in China is in the payments sector. In the past decade, the scale and usage rate of online payment users have experienced leapfrog development along with the popularity of mobile internet technology and smart terminals, the expansion of market players to various user groups, the development of consumers’ “contactless” payment habits, and the promotion of online payment methods by the COVID-19 pandemic (Fig. 6.3). As of December 2021, the scale of China’s online payment users amounted to 904 million, accounting for 87.6% of the overall internet users. Online payment has been infused into all aspects of economic life, including e-commerce, restaurants, superstores, transportation, education, and healthcare. The providers of network payment services are mainly comprised of commercial banks and payment institutions licensed for network payment services. Commercial banks enjoy a clear advantage regarding online payments. In terms of mobile payments, payment institutions are prominent for their small and decentralized amounts and wider coverage. Bar code payment is the most common mobile payment method used in China. According to the research of Payment and Clearing Association of China, 95% of mobile payment users used bar code payment in 2020. In 2020, there are 255 million daily average bar code payment transactions processed by banks and payment institutions, with an average amount of RMB 163 per payment. 909.29 billion transactions were made with payment amounts of RMB 0–500 (inclusive), accounting for 97% of the total number of transactions. The transaction amount was RMB 12.78 trillion, accounting for 84% of the total transaction amount.22 The bar code payment is widely used in supermarket shopping, restaurants and convenience stores and other daily consumption scenarios. The top three ranked in order are supermarkets, restaurants and convenience stores (Fig. 6.4). 21

According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions (Order of the People’s Bank of China, No. 2, 2010), network payment refers to the act of transferring monetary funds between recipients and payers relying on public or private networks, including currency exchange, internet payment, mobile phone payment, fixed telephone payment, digital TV payment, etc. 22 Data source: China Payment Industry Report 2021 prepared by Payment & Clearing Association of China, China Financial Publishing House.

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Scale of users (10,000 persons)

Usage rate (percent)

Fig. 6.3 Scale and usage rate of online payment users in China. Data source China Internet Network Information Center (CNNIC)

Not use Other Vending machine Cinema Public travel tools Convenience stores or chain stores Restaurants Supermarket 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00%

Fig. 6.4 Various scenarios of bar code payment by users

6.3.2 Digital Credit With the aid of information and communication technologies such as the internet and mobile communications, based on risk data and risk models for cross-validation and risk management, banks automatically accept loan applications and carry out risk assessments online, and perform core business operations such as credit rating approval, contract signing, loan payment and post-loan management to provide loans to eligible borrowers for consumption, daily production and business turnover, etc. For example, in order to address the problems of difficult, expensive, and slow financing for the public, with the model of “mobile internet + technology + finance,”

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China Construction Bank has built a one-stop mobile financial service platform APP to provide full life-cycle services for public such as small and micro-sized enterprises and individual businesses, taking credit financing as the main focus. It allows clients to apply for a loan successfully with the help of a mobile phone. According to the integration of China Construction Bank’s internal systems and processes, clients’ related data are automatically acquired by the system in batch. With big data model algorithms, automated access to clients and products is realized, and exclusive business processes for credit rating small- and micro-sized enterprises are established. More than 20 exclusive credit products are developed according to various data from settlement, account, agriculture-related, supply chain and third party based on groups such as small- and micro-sized enterprises, individual businesses, agriculture-related clients, and upstream and downstream supply chain clients. As of the end of 2020, the financial services platform has been visited more than 110 million times, downloaded more than 15 million times, and the credit rating finance has been granted for RMB 440 billion.23 No physical branches have been set up by internet banks like WeBank, MYBank and XW Bank, who conduct their business entirely on the internet. WeBank, which was established in 2014, is the first internet bank in China. It has actively applied fintech to build a new model of inclusive finance. For individual clients, “Welidai,” a pure credit loan product from WeBank, offers 24/7 h online service. The procedure is convenient and efficient, as all processes are completed on the mobile phone, and the loan is available in a minimum of 40 s. By the end of 2021, “Welidai” has been extended to 31 provinces, autonomous regions and municipalities directly under the central government in China. Over 44% of its clients are from third-tier cities and below, and over 80% of its clients are college-educated and non-white collar practitioners. The average loan amount of “Welidai” is about RMB 8,000, and about 70% of its clients have a single loan cost of less than RMB 100.24 “Weiyedai (Micro Business Credit),” a business working capital loan product provided by WeBank for small and micro-sized enterprises, which is fully online and pure credit, has effectively lowered the threshold for small- and micro-sized enterprises to obtain financing services with features of digitalization, no collateral required, on-demand borrowing and convenient renewal. By the end of 2021, “Weiyedai” has been provided in 29 provinces, autonomous regions, and municipalities directly under the central government, serving more than 300 cities at the county level and above, with more than 60% of its clients receiving their first bank loan. The average amount of credit rating granted to micro and small clients served by “Weiyedai” is about RMB 880,000, and the average amount of withdrawal is about RMB 270,000. About 60% of the micro and small clients spent less than RMB 1,000 on interest for a single loan.25 As a technology driven bank that opened in June 2015, MYBank Bank has been providing pure online financial services to many inclusive financial service recipients 23

Data source: China Rural Finance Service Report 2020. Data source: 2021 Annual Report of WeBank. 25 Data source: 2021 Annual Report of WeBank. 24

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with its “310” model of contactless lending (Box 6.6), which has been in practice for many years, making every mobile phone a convenient bank branch. Thanks to the technical advantages of fintech, MYBank has been expanding its service scope. Its service groups have gradually expanded from the initial online e-commerce to small and micro clients in many industries such as offline retail, catering, apparel, logistics, construction, and manufacturing. By the end of 2021, the number of micro and small operators served by the digital credit of MYBank amounted to 45.53 million. In 2018, the rural finance business of MYBank achieved a breakthrough. By taking advantage of data technology and fintech, and applying agriculture-related data generated by the government in administrative actions and public services, MYBank has expanded the “310 loan model” to the rural areas with the construction of a regional exclusive credit rating model to provide pure credit, unsecured and guarantee-free digital credit products for agricultural operators. MYBank, by the end of 2021, has entered into digital inclusive finance cooperation with 1,000 (about 50%) agriculture-related counties and districts in China.26 Box 6.6 “310” Loan Model The “310 loan model” of MYBank, that is, applying in three minutes and disbursing in one second with zero manual intervention, has effectively expanded inclusive financial services based on its low threshold, low cost and wide coverage capabilities. This model has several advantages. The first is strong technical support. Many index systems are designed for industry and scenario characteristics with integrated application of big data, artificial intelligence, satellite remote sensing, privacy computing and other technologies. The second is data profiling. In accordance with the credit and behavioral data accumulated from various production and business activities of small and micro clients in e-commerce, offline acquiring, agricultural farming, etc., a more accurate assessment of clients’ repayment ability and willingness to repay will be made and credit rating will be granted to them, which simplifies the loan application process for clients, significantly reduces credit costs and improves lending efficiency. The third is the risk control system. A set of prediction models and risk control strategies have been developed including operator profiling, risk assessment, access credit rating, pricing strategy, risk warning and monitoring, to form a multi-level and complete big data risk control system. With regard to agricultural farmers, MYBank has further applied satellite remote sensing technology to credit management and developed the “Tomtit” system in 2020. Its characteristics: The first is high-tech identification of crops. Based on satellite photos, a wide variety of crops such as rice, corn, wheat, and apples can be identified

26

Data source: 2021 Annual Report of MYBank.

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through spectral recognition of crops. After farmers circle their own plots on their mobile phones, MYBank will estimate the yield and production value using a risk control model by understanding their planting situation and growth trends, while combining climate, geographic location, industry boom and other factors to grant credit support to farmers with the accurate credit rating. The second is to confirm the information of farmers by data connection. Once farmers circle their farmland on the mobile phone map, the information is cross-referenced and verified compared with the land information recorded by the agriculture department to verify the farmer’s information. The third is to identify the damage by satellite remote sensing. Apart from providing support for crop identification and production value estimation, satellite remote sensing also allows automatic identification of farming households affected by disasters such as floods, to assist financial institutions in providing targeted support.

6.3.3 Digital Insurance The application of digital technology in the insurance industry was initially limited to the expansion of internet channels. As the technology of big data, cloud computing, artificial intelligence and blockchain advances, insurance technology is being applied more frequently to long-tail demand mining, product development and service efficiency improvement. In terms of products, with the use of fintech, insurance companies have improved their capabilities in risk identification, pricing and product management, whereby some uninsurable risks in the past have become insurable risks and new insurance products have been launched. In terms of service, with the employment of fintech, the limitations of physical outlets and business hours have been eliminated, claims processing has been taken online, auditing has been automated, and operations have been made intelligent, which has lowered the threshold and cost of insurance services and improved service efficiency and client experience. While some insurance companies are applying artificial intelligence, aerial drones, satellite remote sensing and other technologies to important aspects of agriculture insurance such as underwriting and claims processing, more accurate digital agriculture insurance services have been offered. For example, a series of scientific and technological innovations have been explored by PICC in the agricultural and rural areas. The first one is the introduction of spatial geographic information technology. A plots information database of 650 million mu of arable land in 29 provincial-level administrative regions was built to assist in the client information collection, underwriting plots verification

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and claims investigation and verification. The second one is the deepening application of blockchain. With the participation of multiple parties, such as farms (households), veterinary health regulators, harmless animal treatment enterprises, slaughtering enterprises, logistics enterprises, insurance companies, etc., the whole process of livestock “from entry to exit” is recorded, and the data is jointly certified and cross-verified to complete the whole process of a closed loop, which effectively identifies and traces the individual livestock, and provides a reliable basis for underwriting inspection, disaster prevention and damage control, and claims investigation and determination. The third one is to promote the application of RFID electronic tags. An individual identification of animals is performed by using RFID technology to form animal electronic tags. Through comparing the electronic tags worn by the subject at the time of underwriting and claim settlement, individual identification of the subject is carried out, and then precise underwriting and claim settlement operations are realized. The fourth one is to build a digital agricultural insurance service platform to address the characteristics of agricultural insurance operation process with many points and wide areas and the difficulties of large workload, difficult data collection, information asymmetry, high operation cost and compliance risk, etc., to provide online operation for the whole process of agriculture insurance underwriting and claim settlement, and accelerate the agricultural insurance process reengineering and service upgrading.

6.3.4 Online Investment and Wealth Management Since 2013, the emergence of internet funds represented by Yu’e Bao enabled the popularization and generalization of wealth management products (Fig. 6.5). Traditionally, wealthy people are often targeted by traditional wealth management and investment products with certain thresholds and rules. For example, it is common for bank wealth management products to be invested with a minimum of RMB 30,000 and trust products to be invested with a minimum of RMB 1 million. In June 2013, Yu’e Bao, an online money market fund, was launched by Alibaba and managed by Tian Hong Asset Management Co., Ltd. It is easy to operate, with low threshold (starting from RMB 1), zero commission and available for withdrawal. Apart from the wealth management function, Yu’e Bao may also serve as a direct consumer payment for shopping, transferring funds, paying bills and making repayments. Inspired by Yu’e Bao, similar products have been launched by commercial banks to meet the challenge, which significantly lowered the threshold for wealth management and investment. By the end of 2021, nearly 200 million people were internet wealth management users.

References

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Number of Internet wealth management users (10000)

Usage rate of Internet wealth management ( percent)

Fig. 6.5 Number and usage rate of internet wealth management users. Data source China Internet Network Information Center (CNNIC)

References CEIRC (former name CBRC), CBRC of Effectively Conducting Work on Providing Services to Financial Institution Blank Townships, YJBF [2009] No. 387 (in Chinese). Huang Yiping and Tao Kunyu. Digital Finance Revolution in China: Development, Impact and Regulatory Implications [J]. International Economic Review, 2019(6): 24–35 (in Chinese). Payment & Clearing Association of China. China Payment Industry Report 2021 [R]. China Financial Publishing House, 2021 (in Chinese). PBC. China Rural Finance Service Report 2020 [R]. China Financial Publishing House, 2021 (in Chinese). WeBank. Annual Report of WeBank 2021 [R]. 2021 (in Chinese). Xu Han. Serving Rural Revitalization with Financial Technology [J]. China Finance, 2022(19):33– 34 (in Chinese). Yu Yong. “Insurance + Futures” and Comprehensive Rural Revitalization, China Finance, 2022(05):28–30 (in Chinese). Zhang Jinhai. Promote Rural Revitalization with Technology Empowerment [J]. China Finance, 2022(19):37–38 (in Chinese).

Chapter 7

Achievements in the Development of Inclusive Finance in China

The development of inclusive finance in China adheres to the combination of government guidance and market leadership, the integration of improving basic financial services and improving financial services in key areas, as well as continuing to deepen international exchanges and cooperation in inclusive finance. The development of inclusive finance in China, through the joint efforts of the government and market players, has made remarkable achievements, where basic financial services have been provided in all urban and rural areas, and the financial services for farmers and small- and micro-sized enterprises have improved significantly. Thanks to the wide application of digital technology and other technological innovations, the efficiency and convenience of financial services have been greatly promoted.

7.1 Achievements in the Development of Inclusive Finance in China—Domestic Perspective At the end of 2016, the China’s Inclusive Finance Indicator System was founded by the People’s Bank of China on the basis of reference to the Inclusive Finance Indicator System of international organizations. Since 2017, the “Analysis Report on China’s inclusive Finance Indicators” has been published annually. More than 50 indicators are included in the indicator system in three dimensions: availability, usage, and quality of financial services. The three dimensions of China’s inclusive finance development are investigated below.1

1

If not otherwise specified, the data and information in this section are obtained from the Analysis Report on China’s inclusive Finance Indicators for each year.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_7

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Fig. 7.1 Number of townships without bank branches (pcs). Note By the end of 2020, there were 38,741 townships in China. Data source China Rural Finance Service Report in previous years

7.1.1 Availability of Financial Services Physical availability is one of the key elements of inclusive finance. The coverage of basic financial services has been expanded by China’s comprehensive adoption of setting up institutional outlets, deploying terminals such as electronic machines, agent models (convenient service points, mobile service stations, and helping farmers withdrawal money service points), and mobile internet technology. The number of administrative townships without bank branches is decreasing year by year (Fig. 7.1). In recent years, along with the development of digital payments, the demand of consumers for cash use has declined and the total number of traditional ATMs deployed by commercial banks is on a declining trend. However, the number of new smart ATMs and their share of the overall machines are increasing (Table 7.1). The coverage rate of bank card agricultural withdrawal points at the village level continues to increase, with a smooth business operation (Table 7.2). While the function of the service points to help farmers withdraw money is gradually weakening in developed areas, they still play an important role in less developed areas.

7.1.2 Use of Financial Services 7.1.2.1

Use of Accounts and Bank Cards

The availability of accounts and bank cards is the first step toward eliminating “financial exclusion” by providing access to financial services. While the average number of bank accounts and bank cards held by Chinese residents per capita continues to

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137

Table 7.1 Availability of bank branches and machines Year

2017

Coverage rate of banking institutions in townships (%)

96

Bank branches per 10,000 people (pcs)

1.59

ATMs per 10,000 people (pcs)

6.91

POSes per 10,000 people (pcs)

224.37

2018

2019

96.3

2020

2021

96.61

97.13

98.17

1.59

1.59

1.55

1.65 7.96

7.84

244.72

220.65

7.18

6.71

271.5

275.63

Note The coverage rate of banking institutions in townships refers to the proportion of the number of townships with banking depository-type financial institutions’ branches to the total number of townships

Table 7.2 Availability of agricultural withdrawal points Year

2017

2018

2019

2020

2021

Bank card agricultural withdrawal points (10,000)

91.4

86.49

87.35

89.33

81.1

Coverage rate of bank card agricultural withdrawal points (%)

97.34

98.23

99.21

99.31

99.6

4.51

4.63

4.26

3.99

3651.92

3618.69

3549.36

3531.24

Number of businesses handled (100 million) Amount of businesses handled (RMB 100 million)

4.05 3486.8

Note Businesses handled include cash withdrawals, remittances, and agent bill payment

increase, bank card transactions have grown steadily and the proportion of actively used accounts remains high (Table 7.3). Table 7.3 Use of accounts and bank cards Year

2017

2018

2019

2020

2021

Number of bank accounts per capita (pcs)

6.6

7.22

8.06

8.83

9.61

Bank card per capita

4.81

5.44

6.01

6.34

6.55

Combined debit and credit cards per capita

0.39

0.49

0.53

0.55

0.57

Number of bank card transactions per capita

150.75

229.98

244.67

Proportion of active accounts (%)

107.5 87.06

88.64

89.90

91.90

–

303.71

Proportion of active accounts in rural areas (%)

81.44

82.25

83.37

88.01

–

Note Active use account refers to an account with transaction records in the last 6 months, including the bank settlement account and payment account opened with a non-banking payment institution

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Commercial banks

Payment institution

Fig. 7.2 Development of mobile payment in China. Data source China Payment Industry Report 2021 prepared by Payment and Clearing Association of China, China Financial Publishing House

7.1.2.2

Use of Mobile Payment

As of June 2022, the total number of mobile phone users in China amounted to 1.668 billion, while the number of internet users reached 1.051 billion, and the proportion of internet users using mobile phones to access the internet was 99.6%.2 Broadband is available to all current administrative villages in China, and the internet penetration rate in rural areas has reached 58.8%. Accompanied by the popularity of the internet and mobile phones, mobile payment in China has developed rapidly (Fig. 7.2). Payment services are continuously penetrated to remote areas by most market players, which gets rid of the dependence of traditional payment methods on business branches and effectively improves the convenience and coverage of payment services. Thanks to the development in recent years, the mobile payment scene in China has become more convenient and has a larger volume of users, allowing people to enjoy all kinds of uninterrupted payment services without leaving their homes. Project of mobile payment for the convenience of the public is being actively advanced across China to carry out the age-appropriate transformation of online and offline services, and address the “digital gap” and other problems faced by the elderly.

7.1.2.3

Use of Credit

(a) Agriculture-related loans The three agricultures (agriculture, rural areas, and farmers) are the weak link of financial services, and the key service targets of inclusive finance. The issues of farmers, agriculture and rural development are of utmost concern to the Chinese government. Under the guidance of multi-departmental policies and the joint efforts 2

Data source: China Internet Network Information Center (CNNIC), The 50th Statistic Report of China Internet Network Development State.

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Fig. 7.3 Loans to rural and farm households. Note The rural loans cover loans to farmers and loans to rural enterprises and various organizations. Farmers’ loans are all loans issued by financial institutions to farmers, including farm production and business loans and farm consumer loans. Data source China Rural Finance Service Report 2020

of the majority of financial institutions, the credit investment in the three agricultures has continued to grow steadily, effectively supporting agricultural and rural construction and farmers’ production and livelihood. In order to provide a comprehensive and systematic reflection of agriculture-related loan disbursements, the PBOC and the China Banking Regulatory Commission have developed a special statistical system for agriculture-related loans in 2007. From 2007 to 2021, the average annual growth rate of farm loans was 15% and the average annual growth rate of rural loans was 18% (Fig. 7.3). (b) Inclusive loans for small and micro-sized enterprise No matter in China or in the world, small- and micro-sized enterprises are the most active business organizations in economic activities and the main channel of employment. Because they are generally facing the problem of “difficult and expensive financing”, small and micro-sized enterprises are also the key areas of inclusive financial services. In China, small and micro-sized enterprises, which includes small and medium-sized enterprises, contribute more than 50% of tax revenue, more than 60% of GDP economic output, more than 70% of scientific and technological innovation and more than 80% of jobs. They are an important driving force for the sustainable development of China’s economy. A high priority is given to the improvement of financial services for small- and micro-sized enterprises, whereby a combination of fiscal, tax, monetary, regulatory, and other policy measures are taken to promote the improvement of financial services capacity and mechanisms for small and microsized enterprises. The approach of inclusive micro and small services has been continuously innovated by local and financial institutions to continuously enhance

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Year-on-year growth rate of

Balance of inclusive small and micro loans (RMB trillion)

inclusive small and micro loans (percent)

Fig. 7.4 Balance and growth rate of inclusive small and micro loans from 2019 to 2021. Note Inclusive small and micro-sized enterprises loans are defined as loans to small and micro-sized enterprises, individual businesses and small and micro-enterprise owners with a single credit limit of less than RMB 10 million. Data source The official website of the People’s Bank of China

the availability and convenience of credit for small and micro-sized enterprises. The scale and coverage of loans for inclusive small and micro-sized enterprises have gradually increased, and financing costs have steadily decreased (Figs. 7.4 and 7.5). As the credit information system is gradually improved and assisted by fintech and other technologies, the willingness and ability of financial institutions to issue unsecured loans has been increasing, and the proportion of unsecured loans among loans to farmers and inclusive small and micro-sized enterprises has increased significantly (Fig. 7.6). (c) Use of inclusive loans for specific subjects Guarantee loans for entrepreneurship are loans guaranteed by the government and bear interest to support individual business start-ups or small- and micro-sized enterprises to expand employment. The targets of the loan include urban registered unemployed people, people with employment difficulties (including people with disabilities), college graduates, rural self-employed farmers, etc.) State loans for student are bank loans led by the government, subsidized by the government, with certain risk compensation given to banks by the government and universities, which are operated jointly by banks, education administration departments and universities to specifically help students from poor families in universities. The borrowing student applies for a loan to the bank with the help of the university to cover the shortage of tuition, accommodation and living expenses during the study period, and repay it in installments after graduation. There is no loan guarantee or

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Loan interest rate of the year (percent)

Number of loan households (10,000)

Fig. 7.5 Number of loan households and interest rate of loans for inclusive small and micro-sized enterprises

Proportion of farmers' loans in unsecured loans (percent)

Proportion of unsecured loans in inclusive small and micro-sized enterprises loans (percent)

Fig. 7.6 Proportion of unsecured loans (%)

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Fig. 7.7 Balance of guarantee loans for entrepreneurship and state loans for students

collateral required for borrowing students, except for a commitment to repay the loan on time and to assume the related legal responsibilities. The inclusive financial products of guarantee loans for entrepreneurship and state loans for student are distinctive and are important financial tools to promote education and employment equity, which play an active role in supporting education, employment and development of low-income groups (Fig. 7.7). (d) Personal credit It is shown that the percentage of adults in the country who have had a loan with a bank increased from 39.78% in 2017 to 49.05% in 2021. Although the balance of personal consumption loans per capita grew steadily, the growth rate slowed down due to the impact of the COVID-19 pandemic (Fig. 7.8).

7.1.2.4

Use of Insurance

In accordance with provisions of the People’s Bank of China,3 about 40% of respondents hold commercial insurance products and services. According to the survey, respondents aged 30–39 hold a relatively high percentage of commercial insurance products and services among all age groups of respondents. Respondents with a monthly income of RMB 20,000–RMB 50,000 hold a relatively high percentage of respondents in all income-groups. The elderly, and respondents with a monthly income of less than RMB 3,000 hold a relatively low percentage, and the gap with the average is all above 10% points. The gap between urban and rural areas in the 3

Analysis Report on China’s inclusive Finance Indicators 2021.

7.1 Achievements in the Development of Inclusive Finance …

Personal consumption loan balance per capita (RMB 10,000)

143

Average credit limit of credit card (RMB 10,000)

Fig. 7.8 Personal consumption loan balance per capita in China. Note Personal consumption loans include housing mortgage loans

percentage of holdings is also more pronounced. The proportion of urban respondents holding is more than 10% points higher than that of rural respondents.4 The insurance density of the country increased from RMB 2,632 per person in 2017 to RMB 3,180 per person in 2021.

7.1.2.5

Use of Other Financial Products

In 2017, there was an average of 45.97% of adults across the country who had purchased wealth management products (including bank wealth management products, treasury bonds, funds, stocks, internet wealth management products, etc.), and the proportion was 32.79% in rural areas (Table 7.4). By 2020, there has seen a slight increase in the proportion, reaching 46.33% and 33.03% for the country and rural areas respectively.

4

Insurance density refers to the amount of insurance premium per capita calculated by local population, which reflects the level of insurance penetration and insurance development of a country or region.

144 Table 7.4 Proportion of adults who purchased wealth management products (%)

7 Achievements in the Development of Inclusive Finance in China

Years

Nationwide

Rural areas

2017

45.97

32.79

2020

46.33

33.03

7.1.3 Consumer Financial Qualification The improvement of national financial qualification level with financial education contributes to the in-depth development of inclusive finance. In order to accurately understand the level of consumer financial literacy and the weaknesses in the field of financial consumer education, and to assess the effectiveness of financial consumer education, a consumer financial qualification questionnaire survey system was established by the People’s Bank of China in 2016 to conduct a comprehensive consumer financial qualification questionnaire survey in 31 provincial administrative entities (excluding Hong Kong, Macao and Taiwan) in 2017, 2019 and 2021, respectively, to analyze consumer financial qualification from multiple perspectives, including consumer attitudes, behaviors, knowledge and skills. According to the results of the survey, the national consumer financial qualification index for 2021 is 66.81, an increase of 3.1 compared to 2017. While Chinese consumers perform relatively well in terms of financial attitudes, they show greater variability in different aspects of financial behavior and skills, and there is a need for them to further improve their basic financial knowledge. In the survey of 2021, the average scores of financial knowledge, financial behavior, financial attitude, and financial skills were 65.21, 73.9, 78.12, and 71.26, respectively. The level of financial qualification among consumers in rural areas was lower than that of urban areas. The largest difference occurred in financial literacy, where consumers in rural areas had a financial literacy score of 61.13, 6.41 points lower than that of urban areas.5 In terms of age, the distribution of Chinese consumers’ financial qualification showed an inverted “U” shape. Financial qualification levels were relatively low among the elderly and youth, who are the focus of continued attention in financial education.

5

Data source: Financial Consumer Protection Bureau of People’s Bank of China: Investigation and Analysis Report on financial qualification of Consumers 2021.

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7.2 Achievements in the Development of Inclusive Finance in China—International Perspective 7.2.1 International Comparison Based on Global Findex Data In 2011, the World Bank conducted the first global survey on inclusive finance and the Global Findex was established. With a comprehensive coverage of adult account opening and the use of financial services such as payments, savings and debit and credit, the database is the most comprehensive and high-impact demand-side database on inclusive finance available. It is not only extensively used by policy makers and experts and scholars, but also applied by many countries to assess the process of achieving the United Nations goal on sustainable development. Four surveys were conducted by the World Bank in 2011, 2014, 2017, and 2021. A sample of 125,000 was surveyed in 2021, covering 123 economies. In June 2022, the survey data were released by the World Bank, which showed significant growth in several inclusive financial indicators in China (Table 7.5), where the account ownership rate and digital payment usage rate ranked among the international advanced levels. From 2011 to 2021,6 the adult account ownership rate in China has increased by 25% points to 89%. Significant progress has also been achieved in financial services such as payments, debit and credit and savings. The proportion of adults borrowing from formal financial institutions has increased from 7% in 2011 to 39% in 2021, and the proportion of savings has increased from 32 to 45%, which are 17 and 21% points higher than the average for developing economies in 2021, respectively. The use of accounts for e-payment has increased significantly from 38% in 2014 to 85% in 2021 (Table 7.5). The development of inclusive finance in China presents the following features. First, the account ownership rate is at a high level. Since the first survey in 2011, the account ownership rate in China has remained higher than the average for developing economies and the global average (Fig. 7.9). 89% of adults in China had accounts Table 7.5 Global Findex survey indicators in China (2011–2021) Survey year

2011

2014

2017

2021

Account ownership rate (%)

63.82

78.93

79.53

88.71

Proportion of using e-payment (%)

–

37.64

59.42

84.54

Participation rate of debit and credit in formal financial institution (%)

7.26

20.23

21.67

39.18

Participation rate of savings in formal financial institutions (%)

32.09

41.15

33.81

44.69

Data source Global Findex 6

Tibet was not included in the Chinese survey sample.

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7 Achievements in the Development of Inclusive Finance in China

Global

Developing economies

China

Fig. 7.9 Adult account ownership rate. Data source Global Findex

in 2021, which was 13 and 18% points higher than the average for the world and developing economies, respectively. Second, digital finance is well developed. In 2021, 85% of Chinese adults were using digital payments, which is considerably higher than the average of 51% in developing economies. In 2021, the survey added a module for the first time on the use of e-payments by adults in developing economies to make payments to merchants (both physical store purchases and online purchases), with the indicator in China at 82%, 45% points higher than the average. If China was excluded, the percentage would be only 20%. Third, financial exclusion is mainly found in low-income and low-education groups. In terms of parity in financial services, financial exclusion due to gender, income, and education level has been improved over the past decade (Table 7.6). By 2021, the gender gap has become narrow and significantly better than that of developing countries such as India and Brazil (Table 7.7). Income and education level gaps were the main factors that affected the equalization of financial services.

7.2.2 International Comparison of Small- and Medium-Sized Enterprises Financing SME Scoreboard is a regular survey on small- and medium-sized enterprises financing conducted by OECD, with data mainly from central banks, financial regulators and relevant government agencies. Since the data originates from the supply side, there is a problem that the indicators are not fully comparable due to the different

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Table 7.6 Parity in financial services in China Survey year Account E-payment Debit and credit Saving services ownership rate services Gender gap

2011

7.57

–

2.24

0

2014

5.06

1.96

3.34

−0.01

2017

7.70

5.36

4.92

9.25

2021

2.58

−0.22

0.53

−1.88

2011

28.63

–

−1.84

23.77

2014

10.46

26.79

18.42

16.84

2017

18.70

32.79

16.23

27.24

2021

9.38

14.34

14.32

17.81

Education level 2011 gap 2014

25.14

–

0.66

19.35

17.02

43.99

26.80

11.38

2017

22.75

40.01

20.78

26.73

2021

14.19

19.69

18.97

22.36

Income gap

Note The data in the table are the gaps in the corresponding survey indicators after the sample was divided into two groups according to different characteristics. Gender gap refers to the difference between the male and female samples. Income gap is the difference between the top 60% of the sample and the bottom 40% of the sample in terms of income, after quintiles of the sample by household income. Education level gap refers to the difference in education level between the sample of middle school and above and the sample of elementary school and below. For example, the account ownership rate in 2021 is 89.92% for the male sample and 87.34% for the female sample, resulting in a gender gap of 2.58% points. Data source: calculations based on Global Findex data

classification standards of small- and medium-sized enterprises in different countries, and some indicators are not fully reported. Therefore, the completeness and consistency of the analysis in this section is not as strong as that of the Global Findex data. The samples of developed and developing economies are considered as comprehensively as possible in order to obtain objective results of the comparison. In general, the credit financing situation and financing conditions of Chinese smalland medium-sized enterprises are at a relatively favorable level in the world, and the share of direct financing is relatively low.

7.2.2.1

The Proportion of Small and Medium-Sized Enterprises Loans in China is at a High Level in the World

According to a survey by the OECD, while the median share of small- and mediumsized enterprises loans among all countries in 2018 was 40.41% of all corporate loans, China was 64.96%, which was much higher than other developing economies and higher than most developed economies (see Fig. 7.10).

36.21

Debit and credit services

Saving services

3.82

44.95

56.11

56.95

E-payment

Debit and credit services

Saving services

5.12 23.8 39.37 32.74

−0.57 −4.39 −9

14.32

−0.03

0.93

15.52

9.69

−0.57 4.17

0.03

0.06

1.58

2.45

5.65

−0.72

Japan

Note The meaning of the data and calculation methods in this table are the same as Table 7.6

5.49

5.86

1.62

39.16

Account ownership rate

C: Education level gap

3.69

36.03

E-payment 0.83

0.5

6.17

10.19

Account ownership rate

B: Income gap 0.32

4.17

−0.82

3.91

−0.9

Debit and credit services

Saving services

−7.83

0.51 −3.27

−4.93

E-payment 0.39

−0.3

−0.05

Germany

−3.7

UK

Account ownership rate

A: Gender gap

US

Table 7.7 Comparison of parity of financial services in selected economies in 2021

13.67

7.34

25.92

5.4

10.37

2.97

20.66

−1.2

2.61

4.53

17.28

−0.04

India

12.59

18.34

14.87

4.28

8.15

21.63

11.98

3.42

9.57

14.59

9.53

6.18

Brazil

22.36

18.97

19.69

14.19

17.81

14.32

14.34

9.38

−1.88

0.53

−0.22

2.58

China

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149

Table 7.8 Rejection rate of small and medium-sized enterprises in selected countries (%) Nationality

2016

2017

2018

2019

2020

China

6.13

4.07

3.69

4.05

3.79

US

–

44.80

32.70

32.4

32.4

UK

19

20

17

22

15

France

6.21

5.14

4.36

2.55

2.38

Serbia

28.18

28.32

17.09

6.52

19.3

Lithuania

10.5

15.6

27.0

43.9

43.49

Data source Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard

Fig. 7.10 Share of small and medium-sized enterprises’ loan balance to the total loan balance of enterprises in 2018 (%). Data source Financing SMEs and Entrepreneurs 2020: An OECD Scoreboard

7.2.2.2

The Proportion of Long-Term Loans to Smalland Medium-Sized Enterprises in China is Lower than That of Middle- and High-Income Countries

The loan maturity of the small- and medium-sized enterprises stock has continued to lengthen worldwide, with the share of medium- and long-term loans (maturity over 1 year) in the sample countries reaching 75% in 2018. With 58%, China’s indicator is significantly lower than the average for middle- and high-income countries.

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Fig. 7.11 Interest rates for small and medium-sized enterprises loans in selected countries in 2020 (%). Data source Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard

7.2.2.3

Loan Rates for Small- and Medium-Sized Enterprises in China Are Much Lower than That of Other Developing Countries

From 2017 to 2020, the interest rate for Chinese small- and medium-sized enterprises has gradually decreased from 5.78 to 4.84%, which is slightly higher than some developed countries such as the US and the UK, but much lower than the emerging and developing economies in the sample (Fig. 7.11).

7.2.2.4

The Loan Rejection Rate of Small- and Micro-sized Enterprises in China Has Been Kept at a Low Level

The loan rejection rate is a measure of the gap between the amount of small- and medium-sized enterprises loans received and the amount requested. The larger the difference between the two, the larger the value of the rejection rate indicator, which means that it is more difficult for small- and medium-sized enterprises to raise funds. This indicator has been at a relatively low level in China. According to the survey, an average of 57.94% of small- and medium-sized enterprises in China attempted to apply for bank loans in 2020, and the usage rate of bank loans for small- and medium-sized enterprises (actual use of loans as a proportion of the credit limit) was 84.55%, both of which were at a high level in the sample countries (Table 7.8).

7.2.2.5

The Requirement of Collateral for Credit Financing for Chinese Small- and Medium-Sized Enterprises is High

In China, collateral is required for about half of the small- and medium-sized enterprises loans (Table 7.9), which is at a high level in the survey sample.

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151

Table 7.9 Guarantee requirements for small and medium-sized enterprises loans in selected countries (%) Nationality

2016

2017

2018

2019

2020

China

52.05

50.28

52.5

–

–

US

–

92.9

94.3

92.20

51.10

UK

45

56

41

39.00

15.00

France

5.17

4.34

4.22

3.83

3.60

Canada

74

64.1

70

–

–

Greece

39.8

25.7

20.7

18.51

18.44

Note The data were available for 15 sample countries for 2019 and 2020; no data were available for China and Canada. Data source Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard

7.2.2.6

The Proportion of Direct Financing for Smalland Medium-Sized Enterprises in China Is Low

In 2019, the financing volume of China’s GEM and NEEQ was RMB 117.783 billion, with a ratio of 1:16 to the increase in loans to small- and micro-sized enterprises in the same period, while in Japan the ratio had reached 1:7.4 in 2018.7 As of the end of 2019, the capital of Chinese venture capital funds under management was RMB 1.21 trillion (approximately USD 173.4 billion).8 In comparison, there were 2,211 venture funds in the U.S. with USD 444 billion in assets under management during the same period.9

7.2.3 International Comparison of Consumers’ Financial Qualification The Investigation and Analysis Report on financial qualification of Consumers 2021, published by the People’s Bank of China (Fig. 7.12), analyzed 44 economies comparatively in three dimensions: financial knowledge, financial behavior and financial attitudes. According to the results, China ranks in the upper-middle range globally. In particular, where China has an advantage in terms of financial attitudes, there is a deficit in basic financial knowledge.

7

According to WFE data, in 2018, JPY 0.81 trillion was raised by Japanese small and medium-sized enterprises listed on JASDAQ and MOTHERS, while the balance of SME loans increased by about JPY 6 trillion in the same period, with a ratio of about 1: 7.4. 8 Data source: Asset Management Association of China. 9 Data source: National Venture Capital Association—NVCA-2020-Yearbook.

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Income group High Financial qualification

income Low and middle income High and middle income

GDP per capita Fig. 7.12 International comparison of consumers’ financial qualifications. Data source Financial Consumer Protection Bureau of People’s Bank of China: Investigation and Analysis Report on financial qualification of Consumers 2021

7.3 Achievements in the Development of Inclusive Finance in China—Perspective of Academic Research According to academic research, the development of inclusive finance in China has played a positive role in improving the income and economic status of vulnerable groups. Specifically, inclusive finance promotes inclusive growth with financial threshold effect, economic growth effect, trickle-down effect and spatial spillover effect.

7.3.1 Financial Threshold Effect Inclusive finance advances the improvement of financial infrastructure, extends the scope of financial services, and lowers the threshold of obtaining financial services for vulnerable groups. The savings help service users to smoothen their consumption and increase their own capital accumulation (Gu and Zhang 2019). Low-threshold credit services enhance credit availability, reduce credit constraints, and enhance productive investment (Zhu and Wang 2017; Lu 2018; Shao and Wang 2017) as well as facilitate entrepreneurial behavior among households with low physical or social capital (Zhang et al. 2019; Yin et al. 2019). Financial services such as insurance and

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education funds promote the ability to cope with risks such as natural disasters and diseases, avoid negative shocks to income from risk events, and strengthen human capital accumulation (Zhang and Yin 2018; Shao and Wang 2017). The improvement of the availability and penetration of financial products and services has broken the “wealth threshold” for initial productive investment (Wang and Zeng 2016). Digital inclusive finance has further improved the efficiency of financial markets, facilitated price discovery and information flow, and promoted financial inclusion (Huang et al. 2019), which is conducive to the overall enhancement of the autonomous development capacity of vulnerable groups, alleviating production and livelihood vulnerability, narrowing the income gap with other groups, and promoting inclusive growth.

7.3.2 Economic Growth Effect The development of inclusive finance promotes economic growth, while the economic growth affects residents’ income and income distribution, which has been shown indirectly in three aspects. The savings effect, as inclusive finance promotes the development of financial intermediation, the richer financial products available to rural residents helps mobilize them to further transform physical savings into monetary savings (Liu and Zhou 2010), which increases rural residents’ willingness to save and concentrate dispersed funds to provide support for rural economic development. In addition, the focus of inclusive finance is the development of counties and the three agricultures, which contributes to avoiding the withdrawal of savings resources from counties through financial channels, weakening the tendency of spatial aggregation of financial exclusion in rural areas, and consolidating and strengthening the endogenous accumulation capacity of local capital (Zheng and Zhu 2019). The investment effect, with the continuous improvement of the rural financial system, is effective in reducing transaction costs, increasing the savings-investment conversion rate (both industrial and human capital investment), and driving economic growth (Bruhn and Love 2014). And He and Li (2019) found that the diffusion of digital finance can facilitate entrepreneurial behaviour and promote the conversion of savings to investment by optimizing the social trust environment and increasing farmers’ trust in society. As for the asset allocation effect, with the full use of their information advantages, financial institutions continue to innovate inclusive financial products to enhance the scale of high-risk financial asset allocation for rural households (Wang and Zhao 2022). Capital is invested into high-return projects, which drives up the average productivity of rural capital, and in turn improves the overall quality of economic development (Tan and Peng 2018). Optimization and upgrading of agriculture-related industries (Zhang 2021; Luo and Luo 2019) enable the creation of more pro-poor economic opportunities and further promote the inclusive growth effect of inclusive finance.

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7.3.3 Trickle-Down Effect and Spatial Spillover Effect The trickle-down effect, in which a portion of people who have developed preferentially in the process of economic development will spontaneously benefit low-income groups through investment and consumption, and will exert long-term effects on income distribution and inclusive growth (Luo and Luo 2019; Gu and Zhang 2019). By combining inclusive finance with digital technology, even farmers who have no access to the internet are able to be included in the market through channels such as e-commerce and are indirectly affected by the digital inclusive finance, to increase their income and boost consumption (Zhang et al. 2020) What’s more, there is a spatial spillover of inclusive growth effects of inclusive finance. The cross-regional mobility of population, financial resources, and other factors facilitates information sharing, financial knowledge and experience exchange, and economic cooperation with neighbourly regions, which will accelerate economic development and income distribution improvement in neighbourly regions (Zhang 2021; Gu et al. 2020).

7.4 China Actively Participates in International Cooperation of Inclusive Finance As an active participant in various activities of international organizations related to the development of inclusive finance, China joined the Alliance for Financial Inclusion (AFI) in September 2011. At the 2010 Group of Twenty (G20) Seoul Summit, the G20 Financial Inclusion Action Plan (FIAP) was supported by the G20 leaders and the Global Partnership for Financial Inclusion (GPFI) was announced as the implementing organization of the FIAP. GPFI is a group composed of G20 countries, interested non-G20 countries, and relevant international organizations, which is dedicated to promoting the development of inclusive finance globally. As a representative, the People’s Bank of China has participated in a range of work under the G20 framework. In 2016, as the Chair of the GPFI, China listed “Development of Digital Inclusive Finance” and “Inclusive Finance Indicator System” as key issues, which has successfully organized the GPFI to complete the “G20 High-Level Principles for Digital Financial Inclusion,” the upgraded “G20 Financial Inclusion Indicator System” and the “G20 Action Plan on SME Financing Implementation Framework,” and other important achievements. In 2017, Germany served as the GPFI Chair and China as Co-Chair. In order to promote the implementation of the “G20 High-Level Principles for Digital Financial Inclusion” and enable them to serve as a practical guide for countries to develop digital inclusive finance, GPFI has published the “G20 Emerging Policy Approaches to Advance Digital Financial Inclusion,” which aims to facilitate action by national governments. With an emphasis on the utilization of digital technology to promote the development of inclusive finance, cases from various countries are presented, and

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the practices adopted by selected countries that are in line with the spirit of the “G20 High-Level Principles for Digital Financial Inclusion” are summarized, for which 5 cases are selected from China. It is, to a certain extent, an indication that China’s experience in digital inclusive finance is of strong relevance to the international community. In 2018, with Argentina occupied the Chair of GPFI, China proactively promoted and supported GPFI in developing and introducing the “G20 Policy Guidelines on Financial Inclusion: Digitalization and the Informal Economy,” which seeks to address the financial exclusion of individuals and small-, medium- and micro-sized enterprises in the informal economy by using digitalization. In 2020, with the sudden emergence of the pandemic, new challenges and new topics for international cooperation on inclusive finance were brought about. A great deal of attention has been paid by the international community to the important role that inclusive finance may play in coping with the impact of the pandemic and supporting the recovery of the real economy. While supporting GPFI to advocate countries to actively respond to the impact of the pandemic through vigorous development of inclusive finance, China would like to share its good experiences and practices. Since 2018, in cooperation with the World Bank, the People’s Bank of China has been running the global inclusive finance initiative FIGI China project, which consistently promotes five subprojects, including credit reference system construction, fintech market development, financial consumer dispute resolution mechanism construction, rural financial product acquisition and design, and fully exploitation of the potential of the farmers’ withdrawal service branches.

References Bruhn, M., and Love I. The Real Impact of Improved Access to Finance: Evidence from Mexico [J]. The Journal of Finance, 2014, 69(3): 1347–76. Gu Ning, Zhang Tian. Financial Inclusion Development and Rural Poverty Reduction: Threshold, Spatial Spillover and Channel Effect [J]. Journal of Agrotechnical Economics, 2019(10):74–91 (in Chinese). Gu Xiaoan et al. Inclusive Finance and Rural Income Reduction from The Perspective of Space: Mechanism Discussion and Empirical Test [J]. Financial Theory & Practice, 2020(01):108–116 (in Chinese). He Jing and Li Qinghai. Digital Finance and Farmers’ Entrepreneurship [J]. Chinese Rural Economy, 2019(01):112–126 (in Chinese). Huang Qian, Li Zheng, Xiong Deping. Poverty Reduction Effect of Digital Inclusive Finance and Its Transmission Mechanism [J]. Reform, 2019(11):90–101 (in Chinese). Liu Xinwei and Zhou Jieqi. The Influence Mechanism of Financial Intermediation on Economy: An Empirical Study from The Perspective of Savings Mobilization and Investment Productivity [J]. Social Science Research, 2010(04):38–43 (in Chinese). Lu Bingjing. An Analysis of The Impact of The Development of Inclusive Finance on Farmers’ Credit Access and Preference: An Empirical Test Based on Household Micro-Data [J]. Contemporary Finance, 2018(07):33–36+52 (in Chinese).

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Luo Hehua and Luo Jiali. Research on the Influences of Inclusive Finance on Rural Poverty Alleviation from a Multidimensional Perspective [J]. Contemporary Economic Management, 2019, 41(03):80–88 (in Chinese). NVCA. National Venture Capital Association Yearbook 2020 [R]. https://nvca.org/research/nvcayearbook/ Payment & Clearing Association of China. China Payment Industry Report 2021 [R]. China Financial Publishing House, 2021 (in Chinese). PBC. Investigation And Analysis Report on Financial Qualification of Consumers 2021 [R]. Financial Consumer Protection Bureau of PBC. 2021 (in Chinese). Shao Hanhua and Wang Kaiyue. Poverty Reduction Effect and the Mechanism of Action in Inclusive Finance: Empirical Analysis Based on Cross-national Panel Data [J]. Financial Economics Research, 2017, 32(06):65–74 (in Chinese). Tan Yanzhi and Peng Qianrui. Inclusive Financial Development and Poverty Alleviation: Direct Impact and Spatial Spillover Effect [J]. Contemporary Finance & Economics, 2018(03):56–67 (in Chinese). Wang Ying Zeng Kanglin. On the Ethic Basis of Inclusive Finance by Analyzing the History of Economics and Policy [J]. Journal of Financial Research, 2016, (6):37–54 (in Chinese). Wang Xiuhua and Zhao Yaxiong. The Development of Digital Finance and Differences in Financial Availability Between Urban and Rural Households [J]. Chinese Rural Economy, 2022(01):44–60 (in Chinese). Yin Zhichao, Peng Changyan, Lyon Angela. The Development and Influence of Family Inclusive Finance in China [J]. Journal of Management World, 2019, 35(02):74–87 (in Chinese). Zhang Hong. Inclusive Financial Development, Industrial Structure Upgrading and Poverty Alleviation: Based on the Empirical Analysis of Spatial Spillover and Threshold Effect [J]. Journal of Financial Development Research, 2021(06):57–64 (in Chinese). Zhang Donghao and Yin Zhichao. Financial Inclusion, Risk Coping and Rural Household Poverty Vulnerability [J]. Chinese Rural Economy, 2018(04):54–73 (in Chinese). Zhang Xun et al. Digital Economy, Financial Inclusion, and Inclusive Growth. Economic Research Journal, 2019, 54(08):71–86 (in Chinese). Zhang Xun et al. Digital Finance and Household Consumption: Theory and Evidence from China [J]. Journal of Management World, 2020, 36(11):48–63 (in Chinese). Zheng Xiufeng and Zhu Yiming. Financial Inclusion, Economic Opportunity and Income Reduction [J]. World Economic Papers, 2019(01):101–120 (in Chinese). Zhu Yiming and Wang Wei. How does Inclusive Finance Achieve Precise Poverty Alleviation? [J]. Journal of Finance and Economics, 2017, 43(10):43–54 (in Chinese).

Chapter 8

Perspectives on the Development of Inclusive Finance in China

A number of countries have prioritized and promoted inclusive finance which has yielded fruitful results in expanding the scope and objectives of inclusive finance. All of these “success stories” of inclusive finance are mirrors of the specific historical, cultural, political and financial context of their countries. While remarkable achievements have been made in the development of inclusive finance in China, which may provide lessons for other countries, it also faces some challenges. In a near future, the goal of China’s inclusive financial development is to serve the common wealth with high-quality development, which will pay more attention to safety and sustainable development, plan for financial health, and enhance the capability and development of inclusive finance.

8.1 Experience of Inclusive Finance in China A joint study by the World Bank and the People’s Bank of China has summarized 6 important lessons of global significance from China’s development and practice of inclusive finance.1

8.1.1 Get Through the Last Kilometre of Financial Services The realization of the high-level availability for financial services is one of the most remarkable successes in China, including both physical service branch coverage and the opening of trading accounts. A series of complementary and sustained policies have been employed by the government, ranging from building a retail payment system and a network of cash withdrawal services for farmers, nurturing 1

World Bank Group and People’s Bank of China (2018).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 H. Zhu and W. Zhang, Financial Inclusion in China, https://doi.org/10.1007/978-981-99-5663-0_8

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new rural financial service providers such as micro-credit companies and rural banks, encouraging banks to set up special branches in rural areas, to adopting differentiated prudential supervision rules to encourage financial service providers to lend to people in rural areas. In China, such a multi-pronged approach is essential to solving fundamental problems such as getting through the last kilometer of financial services.

8.1.2 Investment in Financial Infrastructure In the case of China, with the establishment of a strong and comprehensive financial infrastructure ecosystem (including credit infrastructure and payment system infrastructure), the government plays an effective and critical role in promoting the development of inclusive finance. The establishment of financial infrastructure serves the purpose of promoting competition, innovation and the overall efficiency of the financial sector. Investments in financial infrastructure yield far-reaching positive effects on providers and products, which is considered as a more efficient, appropriate and effective use of government resources for the long-term sustainability of inclusive finance.

8.1.3 Use of Online Networks Web-based online business models (e.g., e-commerce, social networks) allow the use of network effects, technology, economies of scale, big data, and cross-subsidization to facilitate the design and application of innovative financial services. What is proven in China in this regard is that these new models are convenient and efficient in providing financial products on a large scale and at low cost. It should be noted, however, that such business models are not a panacea to provide full inclusive finance to all, which must be complemented by other business models, well-designed policies, and regulatory measures to cover the “last mile” of the consumer base.

8.1.4 Encourage Market Participation and Innovation It is necessary to balance the relationship between innovation and regulation for the development of inclusive finance. New financial service providers, products, services or business models are allowed to enter the market while a clear regulatory framework is not yet developed, thus empowering innovation to thrive while granting regulators some time to explore regulatory approaches. It is the development of the FinTech industry in China that has illustrated the merits of this “inclusive and observant” approach to regulation, as well as the risks associated with it. A large, dynamic and competitive fintech industry has arisen in China, but frequent fraud and misconduct

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by some participants in the industry has also drawn the attention and consideration of policymakers. Therefore, policymakers in China have evolved from an “inclusive and observant” approach to a more comprehensive regulatory framework for new providers and new product policies to ensure the long-term integrity and stability of the financial system and adequate protection for consumers.

8.1.5 Promote Policy Pilot Innovation As mentioned in the previous chapters of this book, relevant departments, including the People’s Bank of China, the CBIRC, and the Ministry of Finance of the People’s Republic of China, as well as local governments, have promoted the development of inclusive finance by conducting policy pilots (i.e., small-scale exploratory pilot projects initiated by the government) and adopting new practices and models. They were initially led by a series of temporary policies embedded with clear objectives and regulatory rules. Once a pilot project is successful, the interim initiative will become a formal policy that will be applied across the country. Policy pilots tend to provide a unique opportunity for financial management to “learn by doing” and balance risk management with policy innovation.

8.1.6 Protect the Rights and Interests of Financial Consumers Consumers are often at a disadvantage in terms of power, information and resources compared with financial service providers. In particular, such imbalances are particularly pronounced for consumers who have had no access to financial services or are underserved in the past when they first acquire formal financial services. It is the financial consumer protection framework that seeks to address these imbalances and protect consumer rights, which in turn ensures that inclusive finance will truly benefit consumers, while also making the overall financial system safer and more robust. As more and more Chinese consumers start to enjoy formal financial services and engage with a variety of innovative digital financial products and services, although it is by all means good in terms of inclusive finance, it will inevitably bring new or additional consumer protection risks, such as the chaos and risks in the P2P lending industry. In recent years, key steps have been advanced by Chinese policymakers to provide a foundation for a strengthened financial consumer protection system. Relevant supervisory regulations and guidelines have been issued in China which cover important aspects of consumer protection, such as information disclosure requirements, codes of business conduct, and dispute resolution mechanisms, while financial

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consumer protection departments have been established internally within each financial management department. Lessons from China suggest that consumer protection must keep pace with financial deepening and financial innovation.

8.2 Challenges Faced by Inclusive Finance in China2 8.2.1 Establish a Correct Concept of Inclusive Finance Although the concept of inclusive finance has become increasingly popular in China, there are still various misconceptions. For example, many people equate inclusive finance with credit subsidies, directive loans and charitable activities, and treat inclusive finance as equivalent to policy finance, overemphasizing sociality and ignoring market principles and sustainability. There is insufficient understanding of the diversity of inclusive financial services, and many people equate inclusive finance with financing, pursuing excessive financing satisfaction and relatively ignoring risks. Few considerations or appropriateness of product design have been taken into account for the diversity of products needed by the financially underserved groups. Others believe that there is no demand to provide financial services in financially backward areas, and even if financial services are provided in these areas, financial institutions have to rely heavily on subsidies. It is necessary for the overall transformation of the concept of inclusive finance to plan the vision of comprehensive and high-quality development of inclusive finance in China, as well as for the gradual improvement of government policies and practices.

8.2.2 Promote the Commercial Sustainability of Inclusive Finance Commercial sustainability is not only the basis for sustainable development of inclusive finance, but also a prerequisite for maintaining the effective and healthy operation of the entire financial system. A number of barriers persist for many financial service providers in China to achieve the commercial sustainability of inclusive finance. In remote or rural areas with small populations, with low per capita income, a single industrial structure and poor infrastructure, it is difficult for financial service providers to make a profit. In urban areas, however, information asymmetry, lack of collateral, incomplete credit information, and high service costs are also problems faced by financial service providers.

2

Partially referenced from World Bank Group and People’s Bank of China (2018).

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It is particularly difficult for small financial service providers such as rural credit cooperatives, rural banks, and micro-credit companies to achieve commercial sustainability. On the one hand, in terms of the business operation capability of inclusive finance, compared with large institutions, these small institutions have obvious shortcomings in operation management, risk prevention and control, and digital technology application. On the other hand, such small institutions also suffer from their own development problems. Weak capital strength, weakened corporate governance and the urgent task of risk resolution are problems faced by rural credit cooperatives. The main problems faced by rural banks are higher operating and management costs due to the sponsor bank-controlled equity structure and lack of innovation. The main problems of micro-credit companies are limited funding sources, high costs, heavy tax burden, and an urgent need to improve their risk management capabilities. A transformation and innovation in the corporate governance, internal management systems, and product design and delivery of financial service providers is required to improve commercial sustainability. What is important for governments is to consider revising elements of the legal and regulatory framework that impede commercial sustainability. It is challenging for both governments and market participants to apply and operate a market-led and commercial sustainability model of inclusive financial development in practice. Governments still play a key and important role in promoting sustainable development of inclusive finance. Its role should be manifested in creating a favorable environment for the development of inclusive finance, including the construction of an overall policy and coordination framework, a legal and regulatory environment, a supportive financial and information and communication infrastructure, and correcting market failures when they occur, so that financial service providers will serve the financially underserved in a sustainable manner. In addition, the government is expected to take on a key role in protecting and educating consumers, outlawing improper and illegal financial activities, and ensuring the stability and integrity of the financial system as a whole.

8.2.3 Comprehensively Understand Digital Finance and Manage Its Risks With a favorable digital infrastructure and a relaxed regulatory environment, digital finance is flourishing in China and playing an active role in enhancing the convenience and availability of financial services. It should be clear that inclusive finance is a different concept from digital finance. While digital finance is a product of innovative technology applied in the financial sector, inclusive finance emphasizes the use of specific business forms to design financial products and services for groups with insufficient financial services. As digital technology may be used to promote inclusive finance, it is a means to achieve goals, not a goal in itself. Many fintech companies in China tend to describe themselves as “inclusive finance” institutions. A number of fintech companies even infringe on consumers’ interests through fraudulent and

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unscrupulous business practices, which not only damage the industry’s reputation but also disrupt people’s awareness and understanding of inclusive finance. Innovations are indispensable to achieve long-term sustainable development of inclusive finance, especially to make full use of digital technology. However, there are significant risks associated with the digital finance model. It is noted in the 2016 Global Partnership for Financial Inclusion (GPFI) white paper3 that the overall picture of evolving inclusive finance risks mirrors some of the characteristics inherent in digital finance. The first is a new type of financial service provider and a new mix of financial service providers. The second is digital technology. The third is to reach consumers mainly through agents. The fourth is new products and services and their combinations. The fifth is toward financially excluded or financially underserviced clients. Operational risk will be compounded by the use of digital technology, the scale of service delivery, and the potential for failure of large systems. Problems with the potential disclosure or misuse of client information and inadequate information disclosure about new business models may exacerbate consumer risk. Any of these risks may be further exacerbated if regulation lags significantly and fails to discipline irresponsible market behavior, which may impact the safety and soundness of the entire financial system. Lessons from the Chinese P2P lending industry show the existence of these risks, which highlight the consequences that may occur when these risks are not fully understood or actively managed. Although some measures have been taken to strengthen digital finance regulation in China, the capacity and capability of the regulator still faces challenges against the world’s leading digital finance market.

8.2.4 Strengthen Financial Consumer Protection and Improve Consumer Financial Ability There are still challenges in China in terms of financial consumer protection and consumer financial capability. Further improvements are needed in the legal and regulatory framework for financial consumer protection to ensure that the consumer protection risks associated with fintech and digital finance are fully taken into account. Rules on disclosure, marketing, security of funds, and dispute resolution regarding the information disclosure, marketing, security of funds, and dispute resolution should also be further expanded to cover fintech companies and to accommodate the needs of digital finance business models. Regulatory efforts need to be further strengthened, especially in the current situation where financial consumer protection increasingly involves cross-market and cross-industry types of cross-cutting financial products and services, and regulatory authorities should further strengthen communication and collaboration. 3

GPFI (2016).

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Advanced consumer financial qualification and financial capability are important supports for inclusive finance. With the increasing digital nature of finance, it requires additional competencies if consumers are to successfully discover, accept, and use the right financial products and services. A survey of consumer financial qualification in China shows that while Chinese consumers perform relatively well in terms of financial attitudes, they show greater variability in different aspects of financial behavior and skills, and there is a need for them to further improve their basic financial knowledge. The level of consumer financial qualification in rural areas is lower than that of urban areas. The level of financial qualification among the elderly and youth is relatively low. The effectiveness of financial knowledge education shall be improved, especially for special groups such as the elderly, who need more targeted financial knowledge education.

8.3 Future Development Direction of Inclusive Finance in China Since the implementation of the “Planning of Promoting the Development of Inclusive Finance (2016–2020),” the coverage, availability and satisfaction of financial services in China have been continuously improved, which has played an active role in coordinating pandemic prevention and control and economic and social development, helping to win the battle against poverty, and making up for the shortcomings in the field of people’s livelihood. In February 2022, the “Implementation Opinions on Promoting the High-Quality Development of Inclusive Finance” were considered and approved at the 24th Meeting of the Central Commission for Comprehensively Deepening Reform of the Communist Party of China.4 It was proposed that the structural reform of the financial supply side must be deepened, more financial resources shall be allocated to key areas and weak links, the shortcomings of financial services such as counties, small- and micro-sized enterprises and new agricultural business entities shall be accelerated, the integration of inclusive finance and green finance, science and innovation finance shall be promoted, and the development of digital inclusive finance shall be advanced in an orderly manner. The system of financial institutions, market system, product system should be optimized, to enhance the insurance and capital market services to protect the function and broaden the direct financing channels. The mechanism for the formulation and implementation of inclusive financial policies should be improved to enhance the accuracy and effectiveness of the policies. Inclusive financial infrastructure, institutional rules, and grassroots

4

Established in 2018 and headed by China’s top leader Xi Jinping, the Central Commission for Comprehensively Deepening Reform of the Communist Party of China (CPC) is a decisionmaking and deliberative coordination body directly under the CPC Central Committee, responsible for the top-level design, overall layout, coordination, overall promotion and supervision of the implementation of major national work.

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governance should be improved, and mechanisms such as risk-sharing compensation should be accelerated to promote the formation of a long-term mechanism with affordable costs and commercial sustainability. Great attention should be paid to prevent financial risks and increase financial supervision. Specifically, the following aspects should be the focus of the future development of inclusive finance in China.

8.3.1 Promoting Rural Revitalization and Common Prosperity with Inclusive Financial Development Currently, the problem of unbalanced and insufficient development in China is most prominent in the countryside, and the most difficult and onerous task of building a modern socialist country remains in the countryside. In 2020, all of China’s rural poor were lifted out of poverty, overall regional poverty was solved, comprehensive victory was achieved in the fight against poverty, and the poverty reduction goals of Transforming Our World: The 2030 Agenda for Sustainable Development were achieved 10 years ahead of schedule. Accordingly, the focus of China’s rural work has shifted from concentration of resources on supporting poverty eradication to the consolidation and expansion of the results of poverty eradication and the comprehensive promotion of rural revitalization, so as to achieve prosperous industry, ecological livability, civilized countryside, effective governance and prosperous living in the countryside. By 2035, it is targeted that the economic strength of areas emerging from poverty will be significantly strengthened, significant progress will be made in rural revitalization, the living standards of low-income rural populations will be significantly improved, the urban–rural gap will be further narrowed, and more obvious and substantial progress will be made in promoting the common prosperity of all people. According to Global Findex 2021 data, 11%, or about 150 million adults, still have no access to financial services in China, of which 60% come from households in the bottom 40% of income rankings. The promotion of more balanced financial services in urban and rural areas, the reasonable use of financial tools by the vulnerable groups to increase their income, and the promotion of common prosperity for all people will be the background and focus of the development of inclusive finance in China in the near future.

8.3.2 Integrated Development of Inclusive Finance, Green Finance, Science and Innovation Finance “Innovation, coordination, green, openness and sharing” is the basic philosophy guiding the future development of China, and the financial industry should provide best services to the real economy under the leadership of the new development

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philosophy. With extensive connotations and numerous service targets, inclusive finance is not only highly compatible with the philosophy of coordinated and shared development, but also has more intersections with other fields. For example, threeagriculture, small and micro-sized enterprises and other key service targets of inclusive finance are often vulnerable to climate and environmental changes, whereas these large groups are also an important force in coping with climate and environmental changes, which should be supported from green finance in promoting ecological agriculture development, beautiful countryside construction, biodiversity protection and green transformation and development of enterprises. Innovative development is inevitable to the incubation and cultivation of science and innovation enterprises, which are mostly small- and micro-sized enterprises and the focus of inclusive financial services, requiring continuous innovation of products and services and smooth financing channels. The five development philosophies of “innovation, coordination, green, openness and sharing” are mutually coherent, reinforcing and intrinsically linked. With the fundamental requirement of financial services for the real economy, inclusive finance shall also integrate with green finance, science, and innovation finance, etc. and promote each other.

8.3.3 Promote the Healthy Development of Digital Inclusive Finance There is a more objective and rational understanding by regulatory authorities about the role of fintech and other technological innovations on inclusive finance. Fintech has reduced the cost of financial services, improved the efficiency of financial services, and effectively contributed to inclusive finance. However, the continuous development of fintech has also brought new challenges to China’s regulation, including engaging in financial business without a license or beyond the scope, unfair competition through monopoly position, and threats to personal privacy and information security.5 Digital transformation of financial services will effectively contribute to changes in the development and governance of inclusive finance. Facing the tide of the rapid advancing digital economy, it is important to make comprehensive use of emerging technologies to provide digital and intelligent services and enhance financial product innovation and services. Apply digital technology fully to prevent and control risks and enhance the safe, convenient and sustainable development of inclusive finance. On the other hand, it is necessary to improve the digital inclusive finance regulatory system, make up for the regulatory shortcomings and improve the level of regulatory technology6 Measures to promote the standardized and healthy sustainable development of the platform economy have been introduced in China one after another. The first is that finance, as a licensed industry, must be licensed to operate. The second is to establish an appropriate firewall to avoid the spread 5 6

Yi (2021). Liu (2021).

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of financial risks across sectors and industries. The third is to break the improper connection between financial and commercial information to prevent the monopoly arising from the closed-loop effect of “data—network effect—financial business”. In the future, efforts shall be made to promote innovation and create a good ecology for the development of digital inclusive finance.

8.3.4 Build a Long-Term Mechanism for Inclusive Finance Commercial Sustainability It is crucial to give full play to the decisive role of the market in the allocation of financial resources, stimulate the enthusiasm and initiative of market players related to inclusive finance, and build a competitive and orderly supply pattern of inclusive finance to achieve sustainable commercial development of inclusive finance. The distribution and positioning of policy banks, large commercial banks, small and medium-sized commercial banks and MFIs should be clarified to form a pattern of inclusive financial supply with staggered development and complementary advantages. Deepen the construction of a risk-sharing mechanism for inclusive finance, expand the scope of insurance coverage, and improve the level and coverage of insurance coverage. Strengthen the inclusiveness of the capital market and expand the proportion of direct financing in inclusive finance. Refine the legal and regulatory framework for inclusive finance and create an environment with fair, open and equitable competition. Continue to give priority to the development of credit, payment, information and communication, data and other infrastructure to support the development of inclusive finance. Strengthen policies and resources in areas of market failure and strengthen legal system protection.

8.3.5 Preventing Financial Risks to Achieve Safe Development Change of development model, impact of the COVID-19 pandemic and application of fintech have increased the pressure of risk prevention and control in China’s inclusive finance sector. With the bottom line and goal of resolutely guarding against systemic financial risks, the regulatory authorities will attach more importance to safe development, manage the dynamic balance between promoting the development of inclusive finance and preventing financial risks, adopt a two-pronged approach of prudential supervision and behavioral regulation, strengthen risk monitoring and assessment of key industries, key enterprises and key institutions in inclusive finance, enhance corporate governance of small and medium-sized financial institutions, and strive for early identification, early warning, early detection and early treatment of financial risks. The responsible finance philosophy of financial service providers shall

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be further strengthened to provide appropriate and effective financial services fairly and universally, disclose information to consumers openly and transparently, and carry out responsible financial innovation within the framework of legal compliance. Strengthen financial knowledge popularization and consumer education, eradicate inappropriate and illegal financial activities, change the vulnerable and passive position of consumers in the process of financial services, and effectively protect the long-term and fundamental interests of financial consumers.

8.3.6 Promote Financial Health and Enhance Financial Resilience Financial health has become a growing concern for the international community in recent years, and the COVID-19 pandemic has further highlighted the vulnerability of financial consumers. In January 2021, the Working Group on Financial Health was initiated by the Special Representative of the UN Secretary-General for Inclusive Finance to promote financial health within the framework of inclusive finance. A report entitled “Financial Health: An Introduction for Financial Sector Policymakers,” released in September 2021, explains the need for financial health policies. In June 2022, the World Bank released the 2021 “Global Inclusive Finance Survey Data and Analysis Report,” which for the first time included a special chapter on financial health-related indicators. Financial health has been strategized by Chinese regulatory authorities as an advanced form of inclusive financial development. In 2021 Liu Guiping, then Vice Governor of the People’s Bank of China, wrote an article stating that: It is necessary to focus on “whether there is” in the past to “whether it is good” in the present and “whether it is strong” in the future in order to promote the development of inclusive finance with higher quality, with the ideal goal of promoting inclusive groups to achieve and maintain a state of financial health. In such a state, the inclusive group can effectively manage their daily financial activities by correctly applying financial knowledge, scientifically using financial instruments and reasonably adopting financial behaviors to achieve a good financial state There is planning for large expenditures, where revenues are generally available to cover expenses. Maintain a good credit history and debt within an affordable range. Possess savings and insurance that suit themselves and have resilience when faced with unexpected financial shocks. Access to formal investment channels, with risk matching tolerance, sufficient liquidity and safety of assets, and a virtuous cycle in financial terms Financial health is an advanced form of inclusive financial development, which shall be constructed urgently in rural revitalization and common prosperity. In 2022, the Financial Consumer Protection Bureau of the People’s Bank of China attempted for the first time to construct a financial health indicator system for Chinese residents, piloted a financial health questionnaire survey, and initially

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compiled a personal financial health index accordingly.7 It is suggested that, in terms of individual perspective, there is a certain foundation for the financial health of Chinese residents as a whole, but there is still much room for improvement. From a macro perspective, it is necessary to enhance the development capacity of inclusive finance, and study and explore a policy framework that combines macro, meso and micro in order to promote financial health in a multi-pronged manner on the basis of the existing broad coverage of inclusive finance. Contribute to the consolidation of poverty eradication by improving the financial resilience of rural residents. Contribute to the stimulation of residents’ motivation and potential for innovation and entrepreneurship by optimizing the financial situation of urban and rural residents. Contribute to the reduction of regional gap, urban–rural gap and income gap by addressing the problem of unbalanced and insufficient development of inclusive finance. In the future, the development of inclusive finance in China will focus not only on the total amount but also on the quality of development. Attention will be paid not only to the coverage and availability of financial services on the supply side, but also to the financial health of each financial consumer on the demand side.

References GPFI. Global Standard-Setting Bodies and Financial Inclusion: The Evolving Landscape. Global Partnership for Financial Inclusion White Paper. 2016. https://www.gpfi.org/publications/glo bal-standard-setting-bodies-and-financial-inclusion-evolving-landscape. Liu Guiping. Several Issues on the Development of Financial Inclusion in China [J]. China Finance, 2021 (16): 9–12 (in Chinese). World Bank Group, People’s Bank of China. Toward Universal Financial Inclusion in China: Models, Challenges, and Global Lessons [M]. 2018. Yi Gang. President of the People’s Bank of China Regulatory Practices of Large Technology Companies in China. Speech at the World Conference on the Regulation of Large Technology Companies, Bank for International Settlements (BIS). October 11, 2021. Yu Wenjian. Director of the Financial Consumer Protection Bureau, People’s Bank of China, at the 2022 China International Forum on Inclusive Finance, Playing the Role of the Main Force of Financial Institutions To Provide More Targeted Financial Products and Services for Inclusive Individuals. November 11, 2022 (in Chinese).

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