In recent months, a number of provincial level governments in China have issued their opinions or promulgated specific measures to implement the central government’s guiding opinions on the pilot operations of small-sum loan companies issued earlier this year. Zhejiang, Chongqing, Shanghai, Tianjin, Anhui, Shandong, Shaanxi, Hebei, Gansu, and Hubei are among these provincial-level administrations. Regulators at the provincial levels set up rules to screen the qualifications and financial soundness of the key investors in the small-sum loan companies, and have emphasized the importance of risk management mechanisms for the companies. Specific rules in some provinces stipulate residency requirements for the promoters.

In May 2008, the Chinese Banking Regulatory Commission (CBRC) and the People’s Bank of China (PBOC) jointly released the Guiding Opinions on the Pilot Operation of Small-Sum Loan Companies, the Guiding Opinions), clearing the way for the regulated development of small-sum loan companies. Zhejiang Province was the first to release local implementation rules following the Guiding Opinions. On July 23, 2008, the Interim Measures for Administering the Registration of Pilot Small-Sum Loan Companies of Zhejiang Province,  the Zhejiang Interim Measures) took effect. By early November, Chongqing, Shanghai, Tianjin, Anhui, and Shangdong implemented similar measures. Typically, provincial governments issue their respective guiding opinions under the national Guiding Opinions, and specific measures will follow. At this stage, the provincial governments of Shaanxi, Hebei, Gansu, and Hubei have issued their respective guiding opinions. Some municipalities in the aforementioned provinces have also issued more specific rules under the provincial rules.

The existing measures and guiding opinions issued by each provincial government vary, which in part reflects the different levels of economic development among the provinces. For instance, each provincial-level administration prescribes floors for the registered capital of a small-sum loan company, but the amounts vary. In general, areas with more developed economies require higher floors, but these minimums are all significantly higher than those set forth in the Guiding Opinions, which are RMB5 million for a limited liability company, and RMB 10million for a company limited by equity interest.

The minimum registered capital required for a small-sum loan company formed as a limited liability company is generally RMB50 million in Zhejiang, Tianjin, Hebei, and Shandong; RMB30 million in Shaanxi; RMB20 million in Shanghai, Chongqing, and Anhui; and RMB10 million in Gansu and Hubei. For a small-sum loan company limited by equity interest, the required minimum registered capital is higher. For instance, the threshold amount is RMB100 million in Tianjin, RMB80 million in Zhejiang and Hebei, RMB50 million in Shanghai, and RMB30 million in Chongqing. Zhejiang, Shandong, and Shanghai also allow lower registered capital thresholds for small-sum loan companies registered in less developed counties.

In general, both natural and legal persons may invest in a small-sum loan company, but some provinces have limitations on the identity or residency of the persons who may invest. For instance, the Zhejiang Interim Measures provide that foreign-invested enterprises may not invest in a smallsum loan company. In Chongqing, natural persons investing in small-sum loan companies must be Chinese citizens. In Chongqing, Anhui, and Gansu, more than 50 percent of the promoters of a small-sum loan company must reside in China if the company is limited by equity interest. The rules in Shanghai provide that primary promoters must be locally registered corporate legal persons and reside locally. In Hebei and Shandong, promoters must be local enterprises that are mainstays of the local economy.

Some of the provincial rules provide criteria to evaluate the financial soundness of potential corporate investors in small-sum loan companies. For instance, in Chongqing and Shanghai, potential investors must meet certain standards in terms of their net assets, profitability, and assetliability ratio to receive government approval. The provincial rules also set caps on the percentage of equity interest that a person may hold in a small-sum loan company. For example, the Zhejiang Interim Measures stipulate that a company’s primary promoter may not hold more than 20 percent of its total registered capital, and the equity interest held by the company’s other shareholders and their connected parties may not exceed 10 percent of the company’s registered capital. Also, the shares held by each shareholder may not be less than 5 percent of the registered capital. Throughout China, all the provincial guiding opinions and measures issued so far require that equity holders of small-sum loan companies make their capital contributions in a lump-sum of cash.

The authorities will closely supervise small-sum loan companies’ lending practices, risk management, and internal control mechanisms. For example, under the Zhejiang Interim Measures, a small-sum loan company may neither invest in other entities nor create any branches. A smallsum loan company may only provide small loans, and financial and management consulting services to small enterprises within the administrative region where it is registered. A small deposit company may not collect deposits or illegally raise funds from the public.

The Guiding Opinions provide that small-sum loan companies will operate as market players, and their interest rate is subject to the rate cap mandated by the judicial branch, but may not be lower than 90 percent of the base rate established by the PBOC. The Shanghai government borrows this language in its measures. Chongqing and Hebei set the cap at four times the base rate established by the PBOC. Tianjin sets the cap at twice the PBOC base rate.

Given the many differences in the implementation measures for small-sum loan companies in different regions in China, potential investors need to study the nuances of specific local rules when making their investment decisions