Zhang Chenghui

Research Report No 190, 2001

I. New Characteristics of Financing Difficulty of Privately-owned Enterprises

Since the mid 1990s, along with the development of the market economy in China and changes in the internal and external economic and trade environments, the slow transformation of the operation system of the state-owned economy has become more and more conspicuous. The state-owned economy has experienced considerable growth drop, and its driving role in the national economy has significantly weakened. In sharp contrast, due to the exuberant vitality and market competitiveness, the private economy has overtaken the state-owned economy to become the most active, the fastest developing and the largest contributing sector to economic growth.

Along with the rapid development of the private economy, the problem of financing difficulty that has long haunted private enterprises begins to attract the attention of the government management departments and the financial sector. Nonetheless, financing difficulty of the private enterprises remains to be a practical problem, which has demonstrated some new characteristics under the new situation.

Firstly, there is less difficulty in obtaining short-term fund but a serious shortage of long-term equity capital. In fact, thanks to the effort of local governments, the problem of financing difficulty of private enterprises has been eased. However, the current financial system has only granted short-term loans to private enterprises, while the mid-and long-term credit and equity capital are still seriously insufficient. In particular, instead of short-term lending, a large number of high-tech enterprises in the start-up stage are most in need of the mid- and long-term loans and equity investment, which are very difficult to obtain from the formal financial system.

Secondly, the problem of financing difficulty of large enterprises has been eased but that for the medium-sized and small enterprises still remains. So far, the private economy has developed into three groups. The first includes the famous enterprises, such as Haire, with over ten billion yuan of annual sales income and several ten billion yuan of intangible assets for the brands. These enterprises are the heated targets of bank loans and have no problem in raising funds from the securities market. And, therefore, they do not suffer from financing difficulty. The second covers group companies that have laid foundations through years’ of development. Compared with the first group of enterprises, they do have more difficulty with the banks. However, with their production capacity, assets and reputation, they still manage to find some financing channels. In fact, some of these enterprises are preparing to list in the stock markets. The third group consists of the small and medium-sized enterprises. They are the largest in number, suffer from poor credibility or no credibility, have few assets for mortgage, with incomplete financial system as well as small but frequent capital demands. The banking sector dares not make loans to them so readily. Even when they agree to lend, the lending conditions are relatively harsh. In order to develop, these enterprises usually have to raise fund from informal financial activities.

Thirdly, the large and medium-sized cities enjoy sufficient capital supply but counties or areas below county-level suffer from capital shortage. In recent years, lending capital concentrates increasing in the cities, leaving counties and below-county-level areas without capital supply. According to reports, 88 counties in Shandong Province experienced zero or negative growth in loans in 2000, while none of the counties in Henan Province received any new loan from the state-owned commercial banks.

 Fourthly, the difference among the ownership system is diminishing, but still remains. Because of the long-term influence of the planned economy, the “private ownership fear phobia” is still omnipresent among the state-owned commercial banks. In practice, the ideological problems of the law enforcement and auditing departments lead them to neglect the bad loan accounts of the state-owned enterprises, but to investigate for legal responsibilities when such accounts appear in private enterprises. As a result, the lending staff of banks usually try to avoid making loans to private enterprises, in specific lending appraisal, they tend to report higher risks assessments of private enterprises than that of the state-owned enterprises.

In general, despite a relatively sufficient social capital at present, neither the formal indirect financing system nor the capital market has ever provided sufficient capital to private enterprises. Currently, many private enterprises have taken the path of standard and rapid development. Some of them have completed capital accumulation and are heading for the second business establishment stage. In addition, many private high-tech enterprises with high starting points and more technical content are setting up their business. Capital demand of these enterprises will be more urgent. If financing difficulties remain, they will not only influence the development of the private economy, but also further intensify financing actions outside the formal financial system and affect the healthy operation of the economic system.

II. Causes of Insufficient Capital Supply to Private Enterprises under the Current Indirect Financing System

On the one hand, the commercial banks hold abundant capital but generally feel it is “difficult to lend”. On the other hand, many small and medium-sized private enterprises suffer bitterly from “difficult to borrow”. Indeed, the fundamental cause is the large gap between capital demand and supply.

1. Structural defects in the organisational framework of the banks

Since the reform, in order to break the high monopoly of the state banks and promote market competition, China has gradually set up over 10 share-holding commercial banks and more than 90 urban commercial banks. However, the organisational framework of the banks remains seriously distorted and far from rational. Compared with the rapid development of the small and medium-sized private enterprises, the number and capital strength of the small and medium-sized banks are too insufficient to provide satisfactory financing services. Take Minsheng Bank for example, who targets its services on private enterprises. The proportions of savings and loans of Minsheng Bank only take up 0.4% and 0.36%, respectively, of the total savings and loans of financial institutions. Even if all the urban commercial banks and urban credit co-operatives are taken into account, the proportions of their savings and loans are still as little as 5.5% and 4.7%, respectively1. Over the past few years, the State started to attach importance to financial services for SMEs. Under the supervision and urge of the government, lending departments (committees) for small and medium-sized enterprises have been set up in all large banks. However, there have been few achievements in practice, mainly due to considerations in the operational costs of banks. Lending by large banks to small and medium-sized enterprises will inevitably generate relatively large overhead expenses, which are not conducive to banking efficiency and credit risk control. Along with the strengthening of risk-prevention awareness of the state-owned banks, minimising capital risks has become one of the leading factors in present banking operations. The lending staff naturally lack enthusiasm for the small and medium-sized enterprises with great risks and low profits. After the East Asia financial crisis, the lending rights of the branch agencies of the state-owned large commercial banks were taken back, many non-banking financial institutions were dissolved or annexed, and numerous rural credit co-operatives basically paralysed. As a result, a business blank emerged and the financing difficulty of small and medium-sized private enterprises further intensified.

2. Defects in the operational mechanism of commercial banks and non-banking financial institutions

The four largest state-owned commercial banks have the most evident defects in their operational mechanism. The problem of nominal property ownership of the state banks has never been solved since reform, leading to serious distortions in the legal person governance structure of the banks and the widespread insider control and moral hazards. On the other hand, to certain degree, the government still regards the four largest banks as its affiliating departments and policy instrument. The system under which commercial banks may operate independently, bear the responsibility for their own risks and set their operation objective of maximizing profits has not been established. Under current circumstances, it is very difficult for the four largest state-owed banks to operate according to business rules, improve their financial services and raise efficiency. In particular, with the strengthening of loan risk constraints and the lacking of the matching interest stimulating mechanism, the lending staff usually try to avoid risks in practice by stressing on the “absence of good project”, which only intensifies the financing difficulty of the small and medium-sized private enterprises.

...

If you need the full context, please leave a message on the website.