Download Pawn Financing: One of Viable Financing Channels For SMEs in China

ORIENT ACADEMIC FORUM
Pawn Financing:
One of Viable Financing Channels For SMEs in China
ZHOU Liming
School of Economics, Zhejiang University, P.R.China, 310027
Abstract: SMEs have been playing an important role in China’s economic reform and development and,
to some extent, have become a growth engine in the Chinese economy. However, financing constraints
is the primary bottleneck in the development of SMEs in China. Pawnbroking has the advantage of
short-term emergency financing, and we should pay more attention to it. Pawn financing is one of the
way-out of the dilemma of Chinese SMEs Financing.
Keywords: Pawn financing, Chinese SMEs, Financing Channel
1 Instruction
With the rapid growth of the Chinese economy, many kinds of SMEs have been established and rapidly
developed. There was a tremendous boost in the number of SMEs in the past two decades, and more
than 10 million SMEs were registered in china. Today, SMEs are getting stronger and continue to
contribute to the development of Chinese society and economy. They exert the same function as SMEs
in other countries, which is mainly expressed by promoting employment, technological innovation,
training of entrepreneurs, developing international economic relationships, accelerating market
competition, maintaining economic vitality, and so on. Comparatively speaking, the special nature of
Chinese SMEs manifests their specific influence on the transition of China’s economic system and
social structure. These SMEs lay an important foundation in the process of developing China’s market
economy.
However, the SMEs’ financial resources are incompatible with its important role playing in the national
economy and social development. most smes can not successfully obtain financing from the national
banking system, difficulty in financing has greatly hindered the development of smes. For example,
state-owned commercial banks only increase loans for enterprises with at least an “AA” rating. Some
state-owned commercial banks even stipulate that they will usually not consider an application for a
loan below 3 million yuan1. However, normally, it is difficult for SMEs to obtain an “AA” credit rating,
and the capital needs of most SMEs present “urgent, small, frequent” characteristics. The loan structure
for SMEs is mainly concentrated on working capital loans and short-term loans. In general, the
production and management of SMEs is not stable due to scale limitations. Market luctuation and some
seasonal and temporary factors also influence enterprises operations. The borrowed capital is usually for
short-term purposes, most of which is turnover working capital. According to a survey, the frequency of
SME loans is five times that of large companies, but the sum of loans per enterprise is 0.5 percent that of
large companies. For capital difficulties, a lot of non-state-owned SMEs left the market.
At present, the major financing channels for SMEs remain private loans. There are a lot of cases about
underground-bank financing, loan-sharking and other illegal channels of financing. The underground
financing is large in scale. The private financing is not only high-interest-rate, but also high-risk. In
some areas of Zhejiang province, the monthly interest rate of short-term private loans is 15%, that is
180% a year2.
Therefore, in addition to bank loans, private loans, stock and bond issuance, SMEs need to explore
actively new financing channels. Pawn financing is one of viable financing channels.
There has been less research on pawn financing both at home and abroad. The pawnbroking has been
1
Yanzhong Wang, Financing Difficulties and Structural Characteristics of SMEs in China, China & World
Economy, 34-49,vol.12,No.2,2004
2
http://nb.dsqq.cn/dsqqcn/article/2010/0711/article_116260.html.
410
ORIENT ACADEMIC FORUM
overlooked by economists for a long time. There have been no studies of pawnbroking in North America
using data from past fifty years3. Prior to that, the best studies were William Patterson’s(1899a and
1899b)comparative study of American and European pawnshops. Samuel Levine’s(1913) extensive
description of the pawnbroking business, and Rolf Nugent’s(1939) estimate of total pawnshop credit. In
Britain, pawnbroking has received more attention. Kenneth Hudson(1982) and Melanie Tebbutt(1983)
have written fascinating accounts of the historical development of British pawnbroking, and
A.L.Minkes(1953)studied the dramatic decline of pawnbroking in Britain between 1910 and 1950. With
pawnshops common in much of Latin America and Asia, some attention has been given to their role in
developing countries. F.J.A.Bauman and R.Houtman(1988),for example, provide a good description of
the functioning of pawnshops in Sri Lanka and Mario Lamberte(1988) studies their role in the financial
system of the Philippines. John P.Caskey(1991) had the first comprehensive analysis of pawnbroking in
America. He analyzed the importance of pawnbroking to the American economy, and elaborated the
management , regulation, as well as prospects of pawnbroking. Dr. Robert W. Johnson 1998 Analyzed
the financial markets that serve consumers’ credit needs, with emphasis on the costs and benefits to
consumers of public policies and business practices. The Author explained the rapid growth of
pawnshops in the United States over the past decade and provides an in-depth analysis of the
characteristics of consumers who borrow at pawnshops.
Pawnbroking studies in China started in 1930s. Yang Zhaoyu(1932) introduced initially pawn industry
in China in his book Chinese Pawn Industry. It’s the first studying on pawnbroking in China.Mi
Gonggan(1936) carried on with a comprehensive analysis of Chinese pawnbroking. Wang
Zongpei(1934), Zhang Youliang(1935) and Lu Guoxiang(1936) analyzed the reasons of the decline of
pawnbroking during the Republic of China time and proposed the reform measures. Luo
Bingmian(1977),Wei Qingyuan(1984), Pan Minde(1985) analyzed the socio-economic status and role of
pawnbroking. Liu Qiugeng(1993) studied systematically the evolution of the pawn system. Qu
Yanbin(1993),Li Sha(1993),Ma Junya(2002),Li Jinzheng(2002) carried on a series of basic research on
pawnbroking for the reality application. Wang Hongbing(2002),Ren Liqin(2003),Liuhui(2004),Zeng
Guangyu,Zhao Jing(2005), Zhang Yongcan(2006), Tang Xiaowei(2007),Dai Yahui(2007), Wang
Chenyin(2008), Zhou Ling(2009) analyzed the characteristics of pawn financing, discussed the
possibility of pawn financing of SMEs and the proposed corresponding suggestions
（ ）
，
2 Pawnbroking in China
Pawn is one of the oldest form of consumer lending. It existed in China 2,000 to 3,000 years ago. At the
time of the Southern and Northern Dynasties(about 1,800 years ago) pawnbroking became an industry4.
In China, pawnbroking early operation by the temples, as charitable organizations to helps the poor.
From the Tang Dynasty, pawnbroking as a single temple loan had gradually evolved into a
government-run or private financial behavior. Pawn industry had been a sustained boom in The Song
Dynasty and Yuan Dynasty. In the Ming and Qing Dynasties, Chinese pawnbroking had its most
prosperous time, which played an important role in social economy, and had greatly affected the Chinese
economy and the process of market. Late Qing Dynasty, pawnbroking began to decline.
In early years of the People's Republic of China, as a result of long-term negative publicity,
pawnbroking was considered a tool of exploitation of the old society and was banned. The ban lasted for
more than two decades. In the late-1980s, China’s economic reform had been achieved initial success, a
large number of SMEs and individuals presented the new financing needs. On December 30, 1987, the
first pawnshop after Reform and Open Policy—Chengdu Huamao Pawn Services Firm came into being,
symbolized the pawnbroking as the traditional financial sector in mainland China re-entered the
，
3
John P.Caskey. Pawnbroking in America: The Economics of a Forgotten Credit Market. Jounal of Money, Credit
and Banking, 1991,23(1):86.
4
most scholars hold that pawnbroking as a industry originated 1600-1800 years ago.
411
ORIENT ACADEMIC FORUM
economical stage. Till 1995, the number of pawnshops is reaching to 3013. However, because of the
lack of formal authorities, there were 22 different agencies have authority to vet and approve at that time,
pawnbroking in the management of chaos. In 1996, the People’s Bank of China officially took over the
pawnbroking, and promulgated the Interim Measures for Pawnshop Management. After the clean-up and
rectification, 1300 pawnshops were remained, and pawnshop was considered as a “non-bank financial
institution”. In June, 2000, the regulatory authority of pawnbroking was transfered to the State
Economic and Trade Commission, and pawnshops were considered as “special industrial and
commercial enterprises”. In August, 2001, the State Economic and Trade Commission had released
Pawnshop Management Measures. In July, 2003, State Economic and Trade Commission was abolished,
pawnbroking was supervised by the Department of Commercial Affairs. In April, 2005, the Department
of Commercial Affairs and Ministry of Public Security promulgated jointly Pawnbroking Management
Measures, the legal nature of pawnshop changed as “enterprise legal person who is engaged in specially
pawnbroking activity”.
Compared to other financial institutions’ financing, the first advantage of pawn financing lies in its
simple form of loans. At present, most Chinese commercial banks adopt credit and mortgage lending,
and generally do not accept Pledge lending. These lendings have cumbersome procedures and long
approval cycle. However, with characteristics different from above, pawnbroking can make loans by
both of mortgage and pledge form, and its procedures are more simple. A lot of businesses just take a
few minutes. Therefore pawn financing is suitable for small and medium-sized emergency loans.
The second advantage is its flexibility and less financing constraints. Pawnbroking have greater
flexibility than other financial institutions in terms of loan interest rate line of credit loan process and
operating hours. Best of all, pawn business is easy to acess for credit. There has hardly any requirements
for enterprise's credit. As a result of the loan amount are generally lower than the item’s circulation price
in the secondary market, pawnbroking has a good risk management. It is beneficial for the SMEs who
have poor credit to obtain loans.
The third advantage lies that pawnbrokers are not concerned with the use of the loans. Therefore, the
business of SMEs will never be interfered with. As we know, banks have many restrictions on the use of
the business loans. If the use of the loan does not meet the requirements of banks, the loans will be
likely to be recovered. For this reason, enterprises are unable to adjust its business strategy timely when
market changes have taken place. Pawn loans is different from bank loans. The use of the pawn loans is
unrestricted. The SMEs can freely dispose of the funds obtained from pawnshops.
Besides the above advantages, pawn financing also has two distinct disadvantages: First, its interest
rates are much higher than bank interest rates. Second, some SMEs’ property are not available for
mortgage or pledge.
How to understand the above-mentioned disadvantages?
Firstly, there is no denying that the interest rates of pawn financing are higher than the lending rates of
banks5. But I believe that financing transaction costs should include not only the explicit costs but also
the hidden costs—such as the costs of capital acquisition and the losses caused by shortage of funds.
Because of serious information asymmetry between banks and enterprises, banks can’t be well aware of
the profitability of investment projects and whether funds were properly used. So adverse selection and
moral hazard will arising inevitably. For lack of confidence in SMEs, banks will ask for a higher risk
premium, so as to force the SMEs tend to choose high-risk projects. As a result, the rate of bad debts
increase, bank profits suffer finally. To avoid such situations, bank will not raise interest rates to clear
market, but at a lower level of competitive interest rates allocate to the loans applicants. The SMEs are
restricted more stringent on credit rationing by banks, so that a large number of SMEs being excluded
from bank credit system. If explicit transaction costs and the hidden transaction costs are considered,
with respect to short-term and urgent-need financing, pawn financing have a greater comparative
，
5
，
，
For example in the current pawnshops to take 3.2% of the general interest charge (interest plus a comprehensive
cost) equivalent to the annual interest rate as high as 38.4%.
，
412
ORIENT ACADEMIC FORUM
advantage than bank financing.
Secondly, the property can be used for mortgage or pledge in pawnshops is widely than imagined. In the
current lending business subject to conditions banks have to give up the pledge lending business, and
mortgage only for high value items. Some other institutions are needed to supply that type of service,
and pawnshop is precisely this type of institution.
As a result of the constraints of their asset scale and structure, SMEs usually unable to provide adequate
and effective mortgage items which banks asked for. Mortgage or pledge business in pawn should be
much more flexible. Besides the common house and land-use right, enterprises can also use the
production of goods, commodity stocks, unmarketable goods, motor vehicle, jewelry, securities and
other property rights all can be used as a mortgage or pledge. It allows a large number of “dead items”
will become the “live money”, so that the resources of SMEs can be fully utilized.
Up to the first half of 2010, there were more than 3600 pawnshops in China. From January to October,
2009, Chinese pawnbrokers had paid accumulatively 136.8 billion yuan to 240,000 SMEs, an increase
of 18%. Pawn financing has already become fast financing “the green passage” of SMEs. Some larger
pawnshops, more than 80% clients are SMEs, private enterprises and partnership.
，
，
3 Some Problems in Chinese SMEs’ Pawn Financing
The recovery and development of pawnbroking has brought great convenience to SMEs for its
short-term emergency financing. Simple and convenient approval, flexible loan, broad range of pledge
products, unlimited usage of funds, all the advantages of pawnbroking have met the short-term
emergency financing needs of SMEs, and to some extent, filled the vacancies of bank loans and other
financing channels.
However, there are Some problems in Chinese pawn financing.
The first problem is the over-regulated. Chinese government have imposed too many strict regulations to
pawn business, and it became a major obstacle to the development of pawnbroking. In China,
pawnbroking has long been regarded as a practice usury industry, as a result, it was naturally faced a lot
of institutional constraints since its return of 1987. Many traditional functions of pawnbroking were
canceled or changed, pawnbroking was classified as corporate enterprises, but can not enjoy preferential
policies of corporation enterprises. So it is difficult to make big business rely on their own. The shortage
of funds has constrained the development of pawnshops. According to Pawnbroking Management
Measures, a pawnshop can obtain bank loans only a maximum of 1:1 ratio of its registered capital.
However, banks generally do not advance the enterprises who engaging in lending business. It means, in
fact, it is very difficult for pawnshops to obtain bank loans. The legislation also provides that pawnshop
may not lend money from the non-bank business units or individuals. Therefore, the funds pawnshops
have used for lending, mostly from their own funds. As a result, many pawnshops are short of funds. It
affects directly the scale of SMEs financing from pawnbroking.
Pawnbroking is the essence of a retail financial services industry, the growth of its scale to a large extent
relies on the new varieties of in-depth development and the expansion of network operators. Chain
operation in pawnbroking had been banned by supervisory authorities for a long time. After the
enactment of Pawnbroking Management Measures in 2005, although setting up branchs cross-province
was permitted, but there were a number of restrictions to pawnshops on the registered capital, profit and
operating records, all of which restricted the development of pawnbroking.
The ultra vires management of consignment stores, second-hand goods firms also had a very great
impact on pawnbroking. In fact, these stores and firms engaged in pawn businesses in disguise, and took
away a large portion of pawn businesses on civilian products. Some consignment stores even engaged in
mortgage business on real estate, and raising funds from private loans to engage in illegal loans. The
illegal operation had a bad effect on the normal development of pawnbroking.
In addition, the imperfections of the law have also hindered the development of pawnbroking. The
authorities of pawnbroking had been replaced frequently, and pawnshop had changed frequently in role.
413
ORIENT ACADEMIC FORUM
It reflects the departments of government have not yet reached a consensus on the nature of
pawnbroking. Up to now, the Pawnbroking Management Measures is only a division of rules
promulgated by the ministry of commerce and the ministry of public security in 2005. Compared with
Guarantee Law and Property Law, it has lower levels of legal authority and less binding, and in a
passive position when had conflicts with them. Because of the lack of Pawnbroking Law, pawn business
can’t be independent from the businesses of pledge loan or mortgage loan. It cause pawn business lose
its characteristics, and led to a number of disputes.
4 Countermeasures to the SMEs Pawn Financing Difficulty
To promote employment, economic development and social stability, preferential policies must be
adopted to support SMEs. Financing constraints of SMEs will continue to be a financial barrier which is
unable to overstep in present stage. There is no doubt that pawnbroking should provide more support to
SMEs financing. Here, we will put forward some countermeasures in response to the problems
discussed above.
Firstly the capital resources of pawnshops should be given more auxiliaries. One possible suggestion is
to expand the proportion of the loans from commercial banks,for example, the existing loan proportion
which no more than the registered capital of the pawnshop can be enlarge to five times or more. The
restrictions on lending in the same industry can also be relaxed appropriately. The lending in
pawnbroking can be led by pawn association in certain regions, it can balance the fund surplus and
deficiency between pawnshops, improve efficiency in the use of funds. Further proposal is to learn from
the experience of western countries, arrange some pawn enterprises listing or issuing bonds to raise
funds. Chinese pawnbroking has small-scale and weak ability to resist risks. Therefore, it is necessary to
integrate the resources. A good business model is the implementation of the chain. It can play a scale
effect to reduce costs, and conducive to the formation of brand. For example, the Shanghai Hualian
Pawnshop, learned from the advanced experience of the mode of US pawn chain, combined with its own
characteristics and carried on a successful chain manages. Government should give more preferential
policies to pawn chain, and implement more liberal policies to the cross-province or cross-nation
management.
Secondly, business innovation in pawnbroking is also very important. In view of the financing demand
for SMEs pawnshops can develop the characteristics of business based on the needs of different
consumers, such as the provision of venture capital financing for SMEs, or set up preferential interest
rate specifically for SMEs financing. In addition, the experience came from developed countries can be
learned, and using the internet to build a network of SMEs pawn. Pawnbroking can be considered to be
open for retail and consignment business. It not only accords with the traditional practice of Chinese
pawnbroking,but is in line with the operation of pawnbroking in developed countries. Although China
has not yet allowed the pawnbroker to carry out retail and consignment, such operations are very
common in pawnshops abroad. In the United States, some large and medium-sized pawnshops have
achieved optimal distribution of resources and resource-sharing in pawnbroking, consignment, auction
and other areas by chain operation. These pawnshops have unified standards and operational procedures
in the assessment, marketing and management, so that they have achieved maximize revenue from
economies of scale in operations and modern management.
Thirdly, to recognize and protect the unique operating rules of pawnbroking under the premise of
without disturbing the existing financial order. Pawn, as a special kind of civil acts, has nearly two
thousand years time. The operating rules accumulated for thousands of years, can not be totally changed
by several simple provisions of law. I believe that some hidden rules in pawnbroking should be
recognized and protected if those rules didn’t affect the existing financial and social order, didn’t break
the law and the principle of fairness. For example, the treatment on the unredeemed pledges. According
to the article 43 of Pawnbroking Management Measures, the unredeemed items which more than 30,000
yuan should be sold by public auction. However, a lot of pawnbrokers did not comply with the legal
，
，
414
ORIENT ACADEMIC FORUM
provisions. They usually agreed in the contract that the ownership of the items transferred directly to the
pawnbrokers when the consumers failed to redeem. Of course, these contracts should be null and void,
but there are a large number of such provisions existing in Chinese pawnbroking. No conclusive
evidence to show that such provisions has led to increasing disputes in pawnbroking, and regulatory
authorities have not yet taken more stringent control measures. Why do they dare to violate the
regulations Perhaps a reasonable explanation is pawnbrokers and consumers have no serious loss in
these transactions, even it’s a Kaldor-Hicks Improvement from the whole. As a reduction in the
transactions of the disputes and saving transaction costs, the society welfare increased as a whole.
？
References
[1]. Raymond de Roover The Three Golden Balls of the Pawnbrokers.Bulletin of the Business
Historical Society, 1946,20(4) 117 124
[2]. A.L.Minkes.The Decline of Pawnbroking. Economica. New Series,1953,20(77):10 23
[3]. John P.Caskey.Pawnbroking in America: The Economics of a Forgotten Credit Market. Journal of
Money, Credit and Banking, 1991,23(1):85 99
[4]. John P.Caskey. Fringe banking: check-cashing outlets, pawnshops, and the poor. Russell Sage
Foundation Publications,1996:37 56
[5]. John P.Caskey. Lower income Americans, Higher cost financial services, Madison, Wisconsin: Fil
Res Ins Inc,1997:24 51
[6]. Robert W. Johnson. Pawnbroking In The U.S.:A Profile Of Consumers. Senior Research Associate
Credit Research Center Georgetown University Washington, D.C,1998:7 28
[7]. F. J. A. Bouman, R. Houtman. Pawnbroking as an Instrument of Rural Banking in the Third
world.Economic Development and Cultural Change,1988,37(1):69 89
[8]. Giles William A. Report on reform legislation: address upon corrupt practices acts in England and
the United States : pawnbroking in different countries. LSE Selected Pamphlets, 1899, 17 28
[9]. Melanie Tebbutt.Making Ends Meet: Pawnbroking and Working-Class Credit. Social History,
1985,10(1): 141 142
[10]. W. G. Huff Monetization and Financial Development in Southeast Asia before the Second World
War The Economic History Review, New Series, Vol. 56, No. 2 (May, 2003), pp. 300-345
[11]. Yanzhong Wang, Financing Difficulties and Structural Characteristics of SMEs in China, China &
World Economy, 34-49,vol.12,No.2,2004
[12]. Qu Yanbin. The History of China’s Mortgage. Shenyang: Shenyang Press,2007:17 108(in
Chinese)
[13]. Liu Qiugen. The History of Chinese Pawn System. Shanghai: Shanghai Ancient Books
Press,1995:1 46(in Chinese)
[14]. Li Sha. Theory of modern Pawn. Beijing: Xue Yuan Press.2001:213 262(in Chinese)
[15]. Liu Hui. Mortgage Financing: The Realistic Selection of SME. China SME.2004(4):57 58(in
Chinese)
[16]. Zhou Ling. An Analysis of SMEs’ Pawn Financing. Popular Business.2009(2):45 46(in Chinese)
[17]. Zhang Yongchan. On The Role Of Pawn in SME’s Financing. Market Forum.2006(4):174 175(in
Chinese)
[18]. Tang Xiaowei.SMEs’ Pawn Financing. Enterprise Management.2007(12):70 72(in Chinese)
[19]. Wang Zhongbin, Yu Kui.A Rustic Opinion On The Current Advantages And Risks Of Pawn
financing. Finance And Economy.2008(6):76 78(in Chinese)
[20]. Wang Jigen, Causes of Financing Difficulties of SMEs and Countermeasures, Chinese Foreign
Capital,2009(3)(in Chinese)
[21]. Hu Zongren, An Study on Pawn Legislation After Reform And Opening, GuangDong Social
Sciences 2010(2)(in Chinese)
～
～
～
～
～
～
，
，
～
～
～
～
～
～
～
～
415
～
～
～