Micro-credit institutions are mostly still nascent in China, where stringent economic regulations have kept them from developing along with their Bangladeshi and Indian peers. However, many of those regulations have been relaxed in recent years, and in the next decade they may disappear entirely. As this sector grows, it may become an avenue for responsible agents within the globalized system to work to close the rich-poor gap even as it seems to widen. Already, international micro-credit organizations like Unitus and Kiva are beginning to expand into the growing Chinese market.

In addition to being an excellent model for poverty reduction, micro-credit can also be an investment strategy that allows investors to drastically reduce market risk

At the same time, other organizations such as Wokai and PPDai are encouraging micro-credit contributions and investment by allowing individuals to connect directly with a borrower through the internet. [n4] The system, known as person-to-person (p2p) banking, is fairly straight-forward: a potential loan sponsor finds a profile that tells briefly about the person or family that the loan will go to, what they will do with the loan and so on. The person decides to contribute a sum, say $25 or close to 150 RMB. That sum, along with the contributions of two or three other people, becomes the loan that gets distributed and monitored by the micro-credit field partner. All those who contributed get updates on the loan repayment, brief reports on how the business is progressing and so on. At the end of the year the loan gets repaid, and the contributor gets to decide where it goes next.

Chinese Micro-credit as an Investment Strategy

The growth of this sector presents an unprecedented opportunity for investors. In addition to being an excellent model for poverty reduction, micro-credit can also be an investment strategy that allows investors to drastically reduce market risk. Micro-credit institutions, because of the statistically high rate of repayment with interest of the loans that they give, have a steady means of generating revenue that does not depend as greatly on external market factors, such as the stock market. Unlike most low-risk investments, the micro-credit market in China presents unbelievable opportunities for growth, and by extension, more opportunities for investors to profit on a greater scale.

As the sub-prime crisis deepens and the US market seems to teeter on the brink of a serious recession, the safety of investments has begun to matter a lot more. Even as most sectors of the global economy are feeling the shock waves, micro-credit institutions are experiencing steady growth, since their market indicators are dependent on the good faith of their borrowers which is insulated from the negative trends of the market at large.[n5] Such a view has been further substantiated in recent study by NYU economists which recommends micro-credit investments as a strategy to minimize the danger of a collapsing portfolio. [n6] In these turbulent economic times when even financial giants such as Bear Stearns and Fannie Mae have gotten into trouble, the value of minimizing risk in a globalized market cannot be overstated.

Furthermore, as the U.S. market woes makes investment there less palatable, many firms are finding themselves forced to switch to the Chinese market, with its complicated regulatory framework and where often little is known about the companies with which foreign companies are obliged to do business. [n7] It is particularly this deficit of reliable and verifiable information about the business processes of Chinese firms that should be cause for concern. Under such conditions, finding a reliable strategy for managing risk is absolutely essential. Diversifying investments into micro-credit organizations might be just the ticket for insuring some relative stability in an extremely uncertain market environment.

Conclusion

Micro-credit seems to be a valuable instance where sound economics has become aligned with helping people in a truly profound way. Surely it is a cliché by now, but the process really does help people help themselves. Micro-finance in China presents an opportunity for external actors to constructively participate in China’s development by helping to make sure that hundreds of millions of the rural poor aren’t left out in the cold. There are many reasons to be excited about the prospects of Chinese microfinance, and as the sector expands many will be watching to see how it shapes the accelerating growth of China’s massive economy.

[n1] Ahlin, Christian “How does Micro-credit Work? Risk-Matching, Diversification, and Borrower Selection” Working Paper, February, 2007, p. 1
[n2] Ibid p. 1
[n3] Stay, Tim “A Magical Loan Closing Under A Full Moon in India” Unitus Global Microfinance Accelerator, January 12, 2004
[n4] P2P-Banking.com “Ppdai - p2p lending reaches China” July 22, 2007
[n5] The Daily Times (Pakistan) “Microcredit seen growing despite credit crunch” January 1, 2008
[n6] Krauss, Nicolas and Ingo Walter “Can Microfinance Reduce Portfolio Volatility?” New York University, January, 2008 n7 US-China Today “Understanding Business Risks in China” June 20, 2008