Accion’s work in China began in 2009 with Accion Microcredit China. Located in the city of Chifeng, Accion Microcredit China represented the first wholly-owned foreign Micro Credit Company (MCC) in the province of Inner Mongolia, and only the second wholly foreign-owned MCC in the country. Since then, Accion transitioned ownership of AMC to Grassland Finance Ltd., a Hong Kong holding company incorporated in 2011 with a focus on founding or investing in financial services institutions in China that provide loans and other financial services to China’s vast number of medium, small, and micro enterprises (MSMEs).
Since then, Grassland has grown with a new operation in Wanzhou, Chongqing, and is looking to expand to other high-growth areas in China. Accion is an investor in and operating partner for Grassland. Co-investors include various Sagamore funds and the German Development Bank (DEG).
In April 2015, Grassland Finance Chairman and CEO Rodrigo Yang discussed the company’s history, impact, and future, as well as some of the trends taking place in China’s financial sector with Accion.
Q: How did you start working for Grassland, and how did you begin working with Accion?
A: Believe it or not, my introduction to Accion came through cashmere sweaters. My career started in the textile industry. The best white cashmere is from a prefecture near Chifeng. Our largest international buyers were from the UK’s Marks & Spencer, and they wanted to know if the goats used to ultimately make cashmere were being treated humanely. I suggested that they travel to visit the herdsmen and see what’s going on at the farms. The local government wanted to meet the foreign visitors, and at those meetings the government representatives asked me to make some investments in Inner Mongolia – like a microcredit company (MCC).
At the time, I didn’t even know what that was, but I learned that Accion already had an operation [Accion Microcredit China] in Chifeng. I got Victoria White’s [Senior Vice President and Regional Head, Asia Accion Regional Office] phone number in Washington, D.C., and I cold-called her one day. We eventually worked out a plan with the government to partner with Accion rather than start a new MCC and expand the work that you were already doing.
Q: What are some of the main challenges that you face doing business in China?
A: There are many. The first is China’s size – China is a vast and diverse place. It’s three times the size of the European Union. And there are many differences in culture and government from province to province. It’s not like doing business in Massachusetts and California, where much of the infrastructure and expectations stay the same. We don’t think of China as one country – we even have Chinese nationals travel from one province to another and say that they can’t eat the local food. Things change drastically depending on where you go.
Operationally, our main challenge is human resources. We’re very lucky to have the staff we do, but microfinance and financial inclusion are still relatively new industries in China. Filling management positions can be difficult.
But there are also many opportunities: a minority of the country is doing very well and has been very successful. But the majority of the people are still striving to become a part of the middle class, and like in other countries, they rely on financing and loans to do so. That’s a problem that Grassland can solve.
Q: Why do your customers come to you? Why don’t they go to some of the larger Chinese banks?
A: China has a large banking system, and many of its banks are owned by the state. These larger banks are very selective about who they lend to – usually state-owned banks only lend to state-owned enterprises. And that makes sense from the bank’s perspective: there’s less risk, and it’s easy and efficient to make those loans. But that dynamic doesn’t really help the smaller, private entrepreneurs – particularly the medium, small, and micro enterprise (MSME) owners who don’t have much credit to begin with or don’t have the connections that they need to get their foot in the door at a larger bank.
Q: How many MSMEs are there in China? And what’s the demand for credit like there?
A: There are many MSMEs in China – more than 55 million of them as of 2014. But only 45% of them reported receiving a loan in 2014 – that’s a tremendous gap.
Q: That sounds like a very large market – are there other MCCs looking to make loans to MSMEs?
A: It is a large market, and certainly there are other MCCs doing business in China. In fact, the number of MCCshas boomed over the last four years – with over 2,600 of them in 2010 and more than 8,700 MCCs now.
But if you dig into those figures, you find that many MCCs are what I call ‘relationship MCCs.’ They’re run by former businesspeople who succeed in a given industry and have some of their own money to invest. They apply for an MCC license and make loans to their friends and former industry contacts – and that’s not always a great way to do business. Many MCCs in China are stagnant or in decline because there are so many ‘relationship MCCs’ that made loans based only on who their clients were.
Q: Does that affect the wider microcredit market? Does it affect the economy?
A: To a certain extent, yes. It’s not good for the industry when an MCC goes bust. It gives everyone a bad name, and it’s for that reason that we welcome more centralized regulation. Currently, every MCC is regulated by the local government – we hope that there will eventually be a ‘federal’ agency regulating MCCs.
The impact on the economy is harder to parse: if a state-owned bank lends to a state-owned enterprise, or if a ‘relationship MCC’ lends to one of their former business partners, it’s not going to necessarily make problems for the economy, but it’s also not going to contribute to real solutions, either. Lending to those businesses doesn’t address fundamental problems – doesn’t help the ‘middle market’ of MSMEs that want credit but can’t get it. Helping those customers obtain credit, expand their businesses, build homes, and ultimately move into the middle class, makes a much bigger impact.
Q: How does Grassland plan on doing that? What’s your strategy in China?
A: Our strategy is to invest in what we call ‘non-strategic essentials.’ In this case, ‘strategic’ industries refer to the sectors that the state supports and owns – such as petroleum and banking. Here, ‘strategic’ means ‘strategic to the Communist Party of China.’
There are other ‘essential’ sectors that aren’t state-supported or state-owned. These sectors – such as healthcare or agriculture – have fewer restrictions for private or foreign investments. Because there is no ‘China Health, Inc.,’ there are huge problems and needs in that industry – problems and needs that we want to address.
Q: What else is Grassland pursuing?
A: We’re trying to expand to Guizhou – a very poor province in western China – and Shanghai. We’re also looking at making investments in new P2P lending providers, point of sale lending, and a comprehensive online services provider for supply chain businesses. We’re also exploring mergers and acquisitions as a way to potentially collaborate with other organizations.
Q: As you said, financial inclusion and microfinance are still nascent industries in China. How is Grassland trying to develop and create innovations in the industry there?
A: There’s so much opportunity for innovation in China. China has the largest smartphone user population on earth. In fact, mobile internet users outnumber desktop internet users. That provides us with a very good tool for outreach. We’re working with WeChat now – that’s a Chinese social network that combines aspects of WhatsApp, Facebook, and Amazon. But it also has banking, so people can access Grassland through WeChat. It’s also a way for us to handle customer service and bring in loan applications; that’s where our customers are, so that’s exactly where we need to be.
Q: What kind of impact are you hoping Grassland makes over the long-term?
A: One thing that I think Grassland must do is contribute to the creation of the Chinese middle class. Today our customers are people who have just moved to cities from rural areas or are proprietors of MSMEs. Today, they’re not middle class. But we want to support these people, entrepreneurs, and families so that they will obtain middle-class status. That would be a very satisfying contribution to China’s economy, and its long-term stability.