BEIJING--(BUSINESS WIRE)--In China's financial world, where credit can be hard to come by and is usually secured against collateral, a 38-year-old former Wall Street banker is devoted to nurturing microfinance and building up levels of trust between ordinary citizens, something vital for a prosperous middle-class society to emerge, according to a report by Z. H. STUDIO.
By arranging microloans for small-scale urban and rural Chinese entrepreneurs, Tang Ning says his peer-to-peer lending company CreditEase is helping realize people's most valuable, yet intangible, asset -- their credit.
"We are answering the fundamental question - are Chinese people creditworthy?" says Tang. "Entrepreneurs and poor people - can you trust them? People talk about a harmonious life. If you can't trust your fellow countryman, it's a pretty bad life."
Yet the question of trust is vexed in China, which has seen phenomenal economic growth over the past 30 years accompanied by deep-rooted corruption and scandals surrounding food safety, building safety and the like.
"The lack of trust is very evident. Over the past 100 years in China there has been war, the Cultural Revolution, the shift from a planned economy to a market economy. People became more material-driven and this has twisted some of the fundamental belief in other people that existed in China historically," says Tang.
This is also mirrored in the financial world. Big Chinese state-owned banks are most comfortable lending to big state-owned companies and the private sector in general has a hard time accessing funding. For the hundreds of millions of ambitious but poor Chinese, start-up cash is just not available from the financial industry.
"Their most valuable asset is intangible - it's their credit. How to realise that value? Turn it into cash to help them grow," says Tang.
That's what CreditEase is doing. Launched in 2006 targeting urban micro-entrepreneurs and students with loans of a few thousand dollars to cover the running capital needed to set up an online store or pay the fees for vocational schools, it has since branched out into offering loans of just a few hundred dollars to impoverished women in the Chinese countryside.
The company has grown rapidly, partly because there is huge demand for loans, which also provides grist for Chinese loan sharks charging up to 100 percent in interest per month, Tang says, and partly because there are so few investment options open to Chinese savers.
So far, CreditEase is managing about 50,000 relationships between lenders and borrowers; but the size of the Chinese market is huge. There are more than 50 million micro entrepreneurs and each year there are about 7 million new college graduates, many of whom will take further courses amid stiff competition for white collar jobs. And there're about 200 million desperately poor Chinese in rural areas.
Tang, a Leader of the Year nominee of the Global Microfinance Achievement Awards 2011 announced in Geneva, first encountered microcredit while studying economics in the US. He was so surprised when he heard about Bangladeshi economist Muhammad Yunus's Grameen Bank that in 1997 he decided to travel to Bangladesh and see for himself how it worked.
Every day, he got on a bicycle and journeyed into the fields to meet Bangladeshis who would borrow small quantities of cash in groups of five. "I went into people's homes and fields and observed how they created opportunities for themselves. It was an inspiring experience," Tang says.
"They had to sign a paper and write down an honor code. I thought that was profound. The poor have value. They have credit and credit is value," he says.
CreditEase is using a similar model to Grameen in the Chinese countryside, where many residents scrape a living on less than $220 a year. A borrower may receive a loan of about $300 to buy and feed a small ox, which costs about $90 but will be worth up to $770 in three years time as long as it remains healthy.
The company facilities loans bearing about 10% interest for rural borrowers who also pay a service fee to the platform, making the total financial cost about the rough "comfort zone" of 25-40% for microfinance lending according to a World Bank study, Tang says.
"In the US, peer-to-peer lending is matchmaking. In China it's not so easy - we have to help assess borrowers' creditworthiness," he says.
Thanks to a stringent risk control mechanism, including extensive background checks looking at a borrower's family and social network and overall life stability, CreditEase maintains an overall 2% default rate.
So far, all CreditEase's rural borrowers have been women, who are on Chinese society's very bottom rung but are also more reliable than rural men, in Tang's view, because they are less mobile and more attentive to family welfare.
"In the countryside there is rarely default, which is really encouraging," says Tang. "In urban areas there is a bit of default, mainly due to urban people's much higher mobility, with their use of capital likely to be diverse and deviate from original purpose."
Satya Gabriel, Professor of Economics and Finance at Mount Holyoke College and author of Chinese Capitalism and the Modernist Vision, believes the [microfinance] intervention will have longer-term impacts on the society because of "positive multiplier effects" and general encouragement of entrepreneurship - particularly in rural areas where average incomes are lower and collateral more scarce.
"The poor will tend to be ignored by banks and it is only when someone innovates the idea of microlending that it becomes widely recognized that lending to those with little or no collateral is a very profitable venture," Gabriel says.
CreditEase and the tens or so other companies also offering microfinance in various forms in China are also an attractive prospect for middle-class Chinese, for whom China's underdeveloped financial infrastructure offers few investment opportunities.
Potential rates of return of around 10 percent are far higher than bank deposit rates, while CreditEase's position as a middleman rather than a lender in its own right means it avoids falling foul of a law that prohibits private companies from taking deposits and promising a return of more than four times the bank deposit rate.
Last year the State Council released new guidelines encouraging the private sector to move into the financial sector.
"The government is much interested in building a credit infrastructure, not just for a better economy but for a better society," notes Tang. "If there is more trust among people then there is less of a social issue."
Of course, microfinance alone is not the answer to all the challenges facing China, a nation of 1.4 billion people.
"Microfinance is a good example of people putting too much faith in one particular intervention and doing so with blind faith. And they may be disappointed. This is unfortunate, because microcredit does work, it does generate benefits, it just isn't a panacea," said Dean Karlan, Professor of Economics at Yale University and the founder of Innovations for Poverty Action, a development research organization.
But Tang is convinced that his company, which has 5,000 employees, is not just making money for borrowers, lenders and itself but also improving the atmosphere between Chinese citizens.