Small favors

Government has to do more to reduce the financing obstacles faced by SMEs

Despite their growing importance, the problem of financing for private businesses, especially privately-owned small and medium-sized enterprises, is still a long-term problem in China. Amid the unbalanced economic recovery in the post-pandemic era and external headwinds faced by SMEs, the Chinese policymakers should pay special attention to reducing the funding challenges for private businesses.

The availability of credit to private businesses is not high in terms of their status in the national economy. According to China Banking and Insurance Regulatory Commission, new lending to private businesses was 4.4 trillion yuan ($673 billion) in 2019, accounting for 23 percent of all new loans (including personal loans). In comparison, the private businesses account for more than 90 percent of the number of the enterprises in China, contribute more than 60 percent of the country's GDP, and provided over 80 percent of urban jobs. And the financing costs for private businesses are still high as the average interest rate for loans to the private sector stood at 5.97 percent in 2019.

SMEs have long been considered by banks as high-input cost, low-profit and high-risk clients. China has unveiled a string of measures to give SMEs wider access to financing, but in general, SMEs still face the problem of difficult and expensive financing. There are three reasons for the financing difficulties of private businesses, especially SMEs.

First, market-oriented reforms have yet to be fully implemented in China's banking system. China's banking sector mainly consists of traditional banks including large State-owned banks, joint-stock commercial banks, city commercial banks and rural cooperative financial institutions, and it lacks institutions that truly serve the financing needs of private companies. Over the past four decades, China's economy has undergone a fundamental change, from complete reliance on state-owned and collective enterprises to a mixed economy where private enterprises play a strong role, making it more difficult for the banking sector to meet the diversified and individualized financing demands of Chinese businesses.

China's banking regulator did not give a green light to private banks until 2014, and the total number of private banks is still only 19. Apart from their limited total number, private banks also have limited asset size. The average total assets of the 15 private banks that have released annual reports stands at 40.06 billion yuan.

Second, there is yet to be a level playing field for privately-owned and State-owned enterprises. The State-owned enterprises have a degree of government credit, thus increasing the difficulty private businesses face in obtaining bank loans. And such a credit gap will only be amplified when the macroeconomic situation is worsening. That is the root cause of the difficult and expensive financing for private businesses.

Finally, policies and measures that aim at reducing negative externalities of the market are far from enough. Financing inequality faced by private SMEs is a result of the negative externalities of the market economy, which requires the government to step in and play its due role. The world's major economies such as the United States, Europe and Japan have set up specialized agencies to give SMEs wider access to financing, whereas China has not done enough in this regard.

The measures to reduce financing obstacles for SMEs include relaxing restrictions on banking market access, creating a level playing field and beefing up policy support for SMEs. In addition, given the complicated current situation and the status quo of China's banking sector, China needs to adopt administrative measures to improve private businesses' access to bank loans.
First, China should increase the proportion of the private banks in the banking industry, that can truly serve the financing needs of private SMEs to accelerate market-oriented reforms in the banking sector. Moreover, China should encourage private banks to make the most of their advantages of flexible mechanisms and steadily roll out business and service innovations by making the most of new-generation information technologies such as big data and cloud computing to increase the efficiency and coverage of their financial services.

Second, China should create a level playing field for privately-owned and State-owned enterprises to have equal access to funding. The priority is to strengthen supervision over local government financial platforms and other financing platforms and ensure that those platforms have market-based operations in accordance with the direction of SOE reform. The relationship between local governments and those financing platforms should be clarified to reduce direct interventions from local governments in the platforms' management.

Third, a better regulatory framework should be rolled out to reduce the negative externalities of the market. The central bank should proactively use monetary policy tools such as the reserve requirement ratio, medium-term lending facility, central bank lending and discounts, and innovate monetary policy tools to help funding directly get to the real economy and increase the credit support for private enterprises especially SMEs. The government should establish development guidance funds for SMEs and widely attract the participation of private capital.

Finally, administrative measures should be taken in moderation to establish a harmonious relationship between banks and businesses. The China Banking and Insurance Regulatory Commission should overhaul the SME loan scheme by strengthening the requirements for banks in terms of the quantity, ratio and interest rate of loans to SMEs and encourage banks to establish a long-term mechanism in which grassroots banking institutions and staff are given enough incentives and proper liability exemption to serve the financing needs of private companies. The central bank and China Securities Regulatory Commission should give full play to the guidance effect of the bond market and the stock market, by taking the quality and scale of financing services for private companies, especially private SMEs, as an important indicator in assessing banks when they attempt to issue bonds, deposit receipts and stocks.

The author is an associate researcher and deputy director of the Economic Research Department at the China Center for International Economic Exchanges. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

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