Lending to you: Huafon Small-Sum Loan Co. Ltd. is the first micro-credit company in Wenzhou, Zhejiang Province, where micro-credit companies are being supported by the ongoing financial reform [Wang Yongchang/Beijing Review]

Editor's note: The following are translations of excerpts from a speech delivered by Yang Zaiping, vice president of China Banking Association, at the Small and Micro-sized Enterprises Financial Services Forum held on April 22 in Ningbo, Zhejiang Province.

Zhejiang's economic development benefits largely from the Zhejiang Model

There's a line in a poem that reads: "Why is the water in the canal so clear? It is because its source is so clear." The river source for Zhejiang Province's economic achievements is the Zhejiang Model, which is constructed from the following five elements:

First, an orientation toward the individual. People-oriented institutional arrangements are the basis for the development of the private economy. Compared with other Chinese provinces, Zhejiang is more people-oriented. The Zhejiang government has been working hard to strengthen its administrative and public service capabilities.

Second, prioritizing the private sector. Due to historical and geographical reasons, the ratio of Zhejiang's state-owned industries compared to its private business entities is the lowest among China's provinces. The non-public sector output accounts for 90 percent of the province's gross domestic product (GDP). Its economic development is not primarily dependent on massive government investments, state and regional preferential policies or foreign direct investments, but on investments from the regional public.

Third, Zhejiang's entrepreneurs. The region's economic development would not be possible without a group of active business leaders and entrepreneurs. Entrepreneurs are people with special talents and are extremely scarce resources. Achievements by Zhejiang's entrepreneurs can be traced as far back as the Tang Dynasty (618-907 AD). After China's reform and opening up, Zhejiang businessmen have been actively engaged in the business community at home and abroad.

Fourth, the province's vast number of small businesses. Small and micro-sized enterprises have taken a prominent spot on Zhejiang's name card. According to official statistics, by the end of January 2012, the number of small and micro enterprises in Zhejiang reached 569,000, accounting for 97 percent of all of the province's enterprises. More than 1.1 million people work in these small and micro enterprises, accounting for more than half of the province's working professionals. Small and micro-sized enterprises have also generated 56.3 percent of the province's total industrial output.

Fifth, industry clusters. American scholar Michael E. Porter in 1990 first proposed the term "industrial cluster" to analyze the cluster phenomenon in his book, "Competitive Advantage of Nations." He looked into 10 industrialized countries and found the industrial clusters are a common phenomenon in the process of industrialization. Almost every city and county in Zhejiang has one or a number of industry clusters composed of many small and micro enterprises. These industry clusters with regional characteristics have supported the economic growth of Zhejiang, promoted local industrialization process, and thus enhanced the level of urbanization in Zhejiang.

A lesson learned from the private lending crisis

Recently, cases such as the prosecution of Wu Ying for illegal fund raising practices and Wenzhou's bankrupt business owners fleeing from debts drew national spotlight on Zhejiang Province. However, Zhejiang has long been a major center for private loans. It is only in recent days that the crisis in its private lending sector has emerged.

What can we learn from this regional private lending crisis? The most important is financial services should keep up with growth in other economic fields. This can be seen in the growing amount of idle fund in the private sector, where investors only pursue opportunities with high returns. Small and micro enterprises also find it difficult to secure much needed loans to maintain growth, and they have no choice but to risk getting high interest loans from loan sharks rather than established financial institutes.

The solution is to boost financial services to keep up with demand. However, the goal is not just to ease difficulties in financing by small and micro enterprises. It should first guide idle funds through formal financial channels as well as standardize private lending.

The focus of the Wenzhou' financial reform zone should not be breaking the banking monopoly, but building an efficient and robust "financial river dam." The idea is to guide the idle funds in private sector to nourish small and micro enterprises.

"Bee Bank Model" worth promoting

The objectives of Ningbo's Yinzhou Bank are to support the local economy, serve the small enterprises, serve the urban and rural residents, and build up China's most competitive and modern rural cooperative bank. Its objectives are highly consistent with its bee logo. The followings are the five characteristics of the "Bee Bank Model."

First, no businesses are too small or too scattered. For the banks, the so-called bee spirit is to actively support all kinds of businesses no matter how small or how scattered they are.

Second: diligence. Bees are hard-working and diligent. The banks should be going back and forth between different small and micro enterprises to select qualified projects.

Third, be selective about the potential customers. Banks should pick out credible small and micro enterprises and avoid those who are dishonest and are unwilling or unable to pay back loans.

Fourth, personalized services. The banks should utilize their specialty to closely support small and micro enterprises and help them to grow.

Fifth, good governance. The banks should learn from the bees and develop a good governance structure with clear division of labor and a healthy teamwork spirit.

Based on the shareholders and employees sharing profits, Yinzhou Bank Chairman Chen Yaofang said the bank is exploring a mechanism to share its profits with the entire community. In fact, this is another "bee spirit" - result sharing - which goes beyond the ideas of socialism or capitalism. The sharing economy may serve as a good recipe to alleviate China's frictions between labor and capital, between society and industries, and between society and financial institutions.

(This post was first published in Chinese and translated by Li Huiru.)

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