China - Commercially Sustainable Micro and Small Business Finance Project

Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB2372 Project Name China: Commercially Sustainable Micro and Small Business Finance Region EAST ASIA AND PACIFIC Sector Micro- and SME finance (90%); Banking (10%) Project ID P096285 Borrower(s) MINISTRY OF FINANCE OF CHINA Implementing Agency The Ministry of Finance Sanlihe, Xicheng District Beijing100820 Tel: 86-10-6855 1124 Fax: 86-10-68551125 Email: jk.wu@mof.gov.cn China Development Bank No.29 Fuchengmenwaidajie Xicheng District Beijing 100037 Tel: 86-10-6830 7209 Fax: 86-10-68307214 Email: tanbo@cdb.com.cn Environment Category [ ] A [ ] B [] C [X] FI [ ] TBD Date PID Prepared June 21, 2005 Estimated Date of Appraisal Authorization November 3, 2006 Estimated Date of Board Approval February 12, 2007 1. Key development issues and rationale for Bank involvement Despite spectacular achievements, China is confronted with many challenges in maintaining sustainable economic growth, protecting the natural resources and environment; and addressing the rising economic, social and regional inequalities. To meet these challenges, China needs to diversify the sources of economic growth and raise the efficiency of resource allocation, preferably to those that contribute to employment without exerting undue pressure on the already strained environment and heavy demands on natural resources. One potential source for growth is micro, small and medium enterprises (MSMEs), which have contributed importantly to GDP growth, job creation and export earnings. Within the MSME sector, micro and small enterprises (MSEs) will play an indispensable role in meeting these challenges. Promoting MSEs, the majority of which are privately owned, is a government priority in the drive to build a well-off and harmonious society. While MSMEs as a whole remain credit constrained, it is the MSEs that have over time become the forgotten segment. Banks have tended to consider enterprises in the upper end of the SMEs Page 2 2 as more bankable, and microfinance (especially in the rural area) has at least received attention from NGOs and donors. The reasons behind the lack of access to finance by MSEs are numerous and complex. One is that Government officials and banks in China share an entrenched perception that lending to MSEs is inherently risky, in part because past attempts at reaching out to MSEs resulted in unacceptably high losses by banks. Another is a long-standing credit culture biased towards collateral and guarantees. Lacking the ability to process the soft information that is characteristic of MSEs, banks rely heavily on collateral and credit guarantees. Regulatory policies also perpetuated the