Zhou adds that more than 270 loan guarantee agencies have been established in Wenzhou to help small businesses obtain loans. There were only two such loan guarantee agencies in 2000.

Policymakers, at the same time, are recognizing the necessity of developing diversified financial institutions to support small business.

On May 4, the central bank and the China Banking Regulatory Commission published a joint statement encouraging more microcredit firms to be established in different provinces to help finance small businesses - provided the provincial local government could serve as guarantor of the micro loans and supervise the operation of the microcredit firms.

The removal of restrictions allowing qualified microcredit firms to borrow in the inter-bank money market has greatly strengthened their financial capacity to make loans. Previously, microcredit lenders had no other funding source but their own shareholders' capital.

After the May statement was issued, Zhejiang province said it would establish microcredit firms, which are expected to start providing small loans after they get regulatory approval. Other provinces including Guangdong, Jiangsu and Anhui are also preparing to launch microcredit firms.

Zhou Dewen at the Wenzhou council tells China Business Weekly that in Zhejiang province's Wenzhou, home to the largest number of SMEs in China, 16 new microcredit lenders are being established.

Huo Xuewen, deputy director of the Beijing municipal commission for development and reform, said in late July that the capital is working on regulations for microcredit companies and will introduce several small lenders under a pilot scheme before the end of the year.

In mid-August, the government introduced new incentives to encourage the establishment of more small lenders to provide microcredit loans to labor-intensive small firms and retrenched workers starting new businesses.

In a joint statement, the central bank, the Ministry of Finance and the Ministry of Human Resources and Social Security, said microcredit lenders could now raise the lending rate by up to 3 percentage points more than the benchmark rate for loans granted after January 1 to laid-off workers starting new businesses.

The new measures also raised the maximum loan to laid-off workers from 20,000 to 50,000 yuan and the maximum loan for qualified small firms from 1 million to 2 million yuan.

All of these measures are seen as part of the central government's efforts to provide additional capital to encourage the growth of SMEs and create more jobs.

Economists and financial experts agree on the enormous growth potential of microcredit firms, but say the lenders' ability to source low-cost capital will be the key to their sustained growth.

(China Daily October 6, 2008)