While China is a relative newcomer on the scene of microfinance, the scale on which it has been implemented in recent years is revealing about its effectiveness or lack thereof. Over the last decade, microfinance has been touted as a long-term solution to poverty. However, a counter-economic argument is getting increasing traction. Doubtful economists point out that the majority of microfinance loans go to pay down existing debts or to buy essentials, not to create sustainable mini-businesses.

In China, the microfinance loan platform Wokai made some noise a few years ago but shut down due to a lack of funding and with doubts about its results. China could therefore serve as a good study to show, once and for all, whether microfinance works or not.

The status of newcomer may seem erroneous for a country that has seen microfinance deployed in some capacity for 20 years. However, until 2006, the central government did not fully endorse the practice, using it sparingly amidst other poverty alleviation methods. This means it was left to NGOs and the financial sector to provide sustainable financing methods for the country's poor.

So, after 10 years of government-led microfinance, can one say it has been successful? In terms of pure numbers, it would seem so. By the end of 2010, after just five full years of support, 395 specialized financial institutions had opened up across China to issue loans to rural populations. A few years later, the concept clearly continued to blossom as, in 2013, it was reported that more than 3,200 financial businesses were trying their hand at microfinance.

However, have all these loans had a real impact? It is difficult to say. A global study, sponsored by the UK's Department for International Development, concluded that "the microfinance craze has been built on foundations of sand because no clear evidence yet exists that microfinance programs have a positive impact."

Writing in the Guardian, economist Jason Hickel pulverizes microfinance, saying it "ends up making poverty worse." He states that in countries like South Africa, the debts from microfinance were spent on funding consumption, not on creating businesses. Furthermore, even those that did create businesses from the funds relied on poor customer bases that could not afford to support new ventures.

In China, this has not always proven to be the case. A 2012 report from Hanzhong in Shaanxi found no bad loans after six years of lending, primarily to women who raised animals. This focus on agricultural efforts, a holdout from the early days of microfinance in China, is the best way to go. Farmers get richer the more produce they provide and China will never have a shortage of people to sell meat to.

There is yet another twist in the road of China's microfinance landscape that may see it become a major help. The rigid lending practices of many Chinese banks have left the vast majority of the country's micro-companies out in the cold, with no access to credit.

This has meant that microfinance was the only way for micro-enterprises to survive, essentially altering the microfinance paradigm. One repeated criticism facing such loans is that the money is often wasted as the people taking out the loans are not taught basic money management or accounting principles, often saddling them with more debt they cannot afford to pay off.

However, in many cases, microfinance became a way for existing micro-enterprises to survive and perhaps thrive. Instead of having to teach people the ABC of business, the loans went to those with an already existing entrepreneurial spirit.

The author is a Mexico-based analyst of Chinese politics and economics. bizopinion@globaltimes.com.cn