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Current Status, Problems of China’s Credit Guarantee Industry and Reform Suggestions
2015-02-13
By Zhang Chenghui, Research Institute of Finance of DRC
Research Report Vol.17 No.1, 2015
I. Brief Review of the Development of China’s Credit Guarantee Industry
With the approval of the State Council, China’s first professional credit guarantee company, China Economic and Technological Investment and Guarantee Company (later renamed as China National Investment & Guarantee Corporation) was established in 1993. Up to now, it is still the only national non-bank financial institution engaging in credit guarantee, investment and other business approved by the State Council. In December 1994, the Shenzhen High-Tech Investment Co., Limited (formerly known as the Shenzhen High-Tech Industrial Investment Services Co., Limited) was established, which pioneered the set-up of loan guarantee companies by local governments.
In 1999, the “Guidance for the Pilot Establishment of SME Credit Guarantee System” issued by the former National Economic and Trade Commission, clearly defined the business scope and models of different types of SME credit guarantee institutions, and designed the framework of SME credit guarantee system①. In this design, the operator of SME credit guarantee is the government (along with government affiliated institutions and enterprises), with its capital mainly from the fiscal budget, land use right and other operational and non-operational state-owned real estate property. Commercial guarantee institutions and mutual guarantee institutions for enterprises engaging in guarantee business for SMEs serve as a supplement to the SME credit guarantee system. The Guidance stipulates that, in order to prevent risks, the credit granted may not exceed 10 times the guarantee fund. It also request that provinces and cities shall set up SME credit guarantee regulatory committee in order to supervise the credit guarantee, re-guarantee business and institutions within its jurisdiction (including mutual guarantee institutions for enterprises and commercial guarantee institutions).
In 2001, the former National Economic and Trade Commission issued the “Notice on the Establishment of National SME Credit Guarantee System”, extending the pilot area to the whole country. With the vigorous promotion of government at all levels, the number and capital scale of credit guarantee institutions are growing unceasingly, and the secured loans expanding rapidly. The number of guarantee companies increases from 203 in 2000 to 8590 in 2012, with an average annual growth of 36.6%. By the end of 2013, there are 8185 institutions with legal person status in the national financing guarantee industry. The paid-in capital of the industry reaches 879.3 billion yuan, and the guarantee balance reaches 2.57 trillion yuan, of which the guarantee balance of financing guarantee amounts to 2.22 trillion yuan. Guarantee business revenue is 47.4 billion yuan, and the compensation payout rate of financing guarantee is 1.6%.
At present, China’s credit guarantee industry is mainly characterized by the following features.
Firstly, in the domain of credit guarantee business, despite the ever-increasing variety of guarantees②, credit guarantee for loaning is still the major credit guarantee business. At the end of 2013, the guarantee balance is 2.57 trillion yuan, including 2.22 trillion in financing guarantee which occupies 86.4% of the total. According to our findings, these financing guarantees are almost all short-term working capital loan guarantees.
Secondly, commercial guarantee has become the mainstream. Though the credit guarantee system was originally designed to provide nonprofit policy-oriented financial services, in the process of development, financial resources were limited and initial operation and compensation mechanism were imperfect. To make up for the insufficient guarantee funds, government at all levels began to introduce private capital, and later foreign investment into the field of guarantee. Under such circumstances, commercial guarantee soon became predominant. The 2002 survey on guarantee agencies showed that government-funded institutions took up 70% of the total and private investment 30%, which was essentially “government-dominated and nongovernment-supplemented③”. However, by the end of 2004, private funding had already accounted for 50% of the total. In 2012, there were 1907 state-controlled companies out of the 8590 financing guarantee institutions nationwide, accounting for only 22.2% of the total22.2%④.
Thirdly, government at all levels had given great support to credit guarantee institutions. Under the guidance of various policies issued by the central government, local governments in all regions have allocated special funds to compensate financing guarantee companies against risks, and support the sound management of guarantee agencies. With constant extension and revision of these preferential policies, the policy support system in various aspects has been formed for guarantee institutions, ranging from business subsidy, incremental business incentives, capital injection, to indemnity against compensation losses.
II. Problems of China’s Credit Guarantee Industry
1. Lack of sustainable business model
In the current design of the scheme, government allows guarantee agencies to charge as much as 50% of the lending rate. Banks’ lending rates are generally around 7% -10%, and charges of guarantee agencies to enterprises are 3%-5% (charges of government-funded guarantee are lower than those of commercial companies by 1-2 percentage points). Because almost all credit risks are assumed with this rate⑤, the sustainable management of financing guarantee companies cannot be assured. When exposed to credit risks, it is difficult for financing guarantee companies to bear the compensation pressure. Even a single compensation payout will erode the profit of dozens of business. On the other hand, because of government’s strict restraint of the business scope of guarantee companies, they lack the channels for making profit. Figure 1 shows that, during 2011 to 2013, guarantee fee only accounts for 3%-4% in the total assets of the guarantee industry. Although it is 1 percentage point higher than the figure of banks, the risks it undertakes are far greater. After compensation payout is deducted, revenue is only 2.85%, 1.36% and 1.48%, respectively. We find in the survey that, some guarantee companies lose money even in the absence of any compensation payout, owing to the meager revenue which makes it difficult to cover operating cost and risk reserve. In the first drafts of the design on the establishment of the guarantee system, the original plan was to mitigate risks by establishing a re-guarantee mechanism. However, this ideal design was rebuffed repeatedly in practice. Due to the lack of re-guarantee mechanism at the central level, coupled with the lack of sustainability in the re-guarantee mechanism itself, the provincial re-guarantee mechanisms were either not yet established or not effective after the establishment.
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① The SME credit guarantee system is comprised of institutions in prefecture-level cities, provinces, and at the national level. ② Examples could include performance guarantee for construction projects, performance guarantee for commodity trading, consumer credit guarantee, guarantee for litigation property preservation, commercial paper guarantee, agency fee (commission) guarantee, leasing guarantee, registered capital guarantee, guarantee for processing or compensation trade, customs guarantee, government procurement guarantee, e-commerce guarantee, etc. ③ In the absence of accurate categorical data, the author can only make approximate estimation by using state capital share. ④ Though nonprofit mutual guarantee organizations are not included, due to the relatively small proportion of these organizations, with several state-controlled guarantee companies focusing on profit targets, using the ratio of state-controlled companies as the measuring standard will not cause much error. ⑤ Owing to their large scale and good credit, a minority of state-owned guarantee companies still hold certain bargaining power, with banks sharing 10%-20 % of risks for them.
