By Zhao Changwen, Enterprise Research Institute of DRC

Research Report No.185, 2011

The recent financing difficulty confronting small and medium-sized enterprises has attracted attention from all sides. Due to the pressure from various sources, this financing difficulty has become a major factor that may affect the performance of the monetary policy in the fourth quarter of this year. For this reason, we conducted a sweeping survey on this financing difficulty and came up with relevant conclusions.

In particular, we have the following views over whether the monetary policy should be adjusted to ease this financing difficulty:

1. Aggregate credit contraction has truly produced some pressure on the operation of small and medium-sized enterprises, but the whole social and economic system has no liquidity shortage. So a key step is to use the credit policy to fully direct liquidity to flow to the real economy. A simple expansionary monetary policy cannot serve the purpose.

2. The growing financing difficulty of small and medium-sized enterprises mainly comes from the fact that in face of high-level inflation and strong inflation expectation, the drastically rising costs have sharpened the contradiction between the rapid growth of the financing demand and the limited growth of the financing supply capacity and thus widened the debt financing "gap". So, liquidity growth alone cannot solve this financing difficulty. Instead, the financing supply capacity should be expanded and the financing demand should be contained so that the "financing gap" can be narrowed.

Therefore, the current prudent monetary policy must be upheld instead of being eased.

I. Is the Financing Difficulty Facing Small and Medium-Sized Enterprises Induced by Tight Monetary Policy?

Currently, the financing difficulty of small and medium-sized enterprises is virtually an undisputed fact. This difficulty is mainly manifested in the following three aspects:

One, small and medium-sized enterprises have found their financing becoming increasingly difficult. Recently, this difficulty has been repeatedly reported by various media and has been confirmed by the report of the central bank and by our field survey. In particular, the Report of the Central Bank on the Execution of China's Monetary Policy in the Second Quarter of 2011 points out that "The objective difficulty for large, small and medium-sized enterprises to acquire loans will grow in different degrees." Our survey conducted in the cities of Hangzhou, Suzhou, Chengdu, Dalian and Qingdao all indicate that over 80% of respondent enterprises indicated that they found it increasingly difficult to acquire bank loans.

Two, small and medium-sized enterprises have found their financing cost rising sharply. Their financing problem is not only manifested in financing difficulty, but also in higher financing cost. In its Spring Report on the Performance of China's Industrial Economy in 2011, the Ministry of Industry and Information Technology notes that "The overall cost for small and medium-sized enterprises to acquire bank loans has risen at least 13%." The Report of the Central Bank on the Execution of China's Monetary Policy in the Second Quarter of 2011 also indicates that "The interest rate of the loans granted by financial institutions to non-financial enterprises and other sectors in the first half of the year continued to rise. The weighted average interest rate of loans was 7.29% in June, up 0.38 percentage points over the March level." According to a survey report, entitled The Current Four Phenomena of Small-Business Financing in Face of Macro Regulation Deserve Attention and prepared by China Banking Regulatory Commission, most banking institutions in a centrally-administered municipality have raised their benchmark interest rate by 20%~30% and some of them have even raised the rate by 50%~60%. Meanwhile, some banks have imposed many additional terms. By charging advisory fee, consulting fee, releasing loans on the basis of deposit deduction and other methods, they have realized an overall return rate for small business loans that is no less than 40% over their benchmark interest rate. The mortgage insurance premium and the guarantee fee paid by small and medium-sized enterprises in order to acquire loans have further driven up their financing cost.

Three, private usurious loans have become the main financing source for many small and medium-sized enterprises. Widespread private financing is both a result of their financing difficulty and also a problem reflecting their financing difficulty. According to the monitoring of the Wenzhou Sub-Branch of the People's Bank of China, 89% families or individuals and 56.6% enterprises in the city of Wenzhou have been involved in private financing and local private financing capacity has reached 56 billion yuan. The latest Report on Wenzhou's Private Financing Market indicates that the overall interest rate of private loans in Wenzhou was 24.4% in June, which was 3.4 percentage points higher year on year. Our survey indicates that over 60% small enterprises in Zhejiang Province have relied on private loans to maintain operation. For sometime, the monthly interest rate was as high as 15%. In the cities of Xiamen and Shishi in Fujian Province, several enterprises borrowing private loans have witnessed their fund chains breaking up. These incidents have involved some banks and guarantee companies in addition to private loaners.

Of course, some people cite the Report of the Central Bank on the Execution of China's Monetary Policy in the Second Quarter of 2011 and maintain that the actual financing difficulty of small and medium-sized enterprises is not as serious as imagined. The report says that "At the end of June 2011, the balance of the RMB loans (including bill discount) of financial institutions granted to small businesses stood at 20.1 trillion yuan, up 18.2% year on year. In particular, the balance of small-business loans was 9.7 trillion yuan, which was up 25.9% year on year and 9 percentage points higher than the average growth rate of all loans."

We have all reasons to believe that these data are correct. But we must know that these data only reflect the supply end of bank loans but do not and cannot accurately reflect the real financing demand of small and medium-sized enterprises or the size of the supply-demand "gap". In fact, we know from our survey that after the financial crisis, many small and medium-sized enterprises have rapidly expanded production and operation, adjusted product structure and carried out industrial transformation in order to meeting the need of market competition, and they have seen their production and operation costs rising due to inflation. As a result, the growth of their financing demand has been very fast. Therefore, we cannot simply take the growth of bank loan balance as an indication of "a further improvement of the financing conditions of these enterprises".

There have been many explanations about the causes of the financing difficulty of small and medium-sized enterprises. Our survey comes to the following conclusions:

1. The tight monetary policy is one of the factors, but not the major factor, that induced the financing difficulty of small and medium-sized enterprises

Some people hold that the tight monetary policy is the main factor that has aggravated the financing difficulty of small and medium-sized enterprises. Their explanation is that as an aggregate policy, the monetary policy is an indiscriminate policy and a tight monetary policy inevitably leads to tight money and has a substantial impact on corporate financing. In other words, as the cost of losing major customers and the risk of providing loans to small and medium-sized enterprises are both higher when credit resources are insufficient, banks are more inclined to distribute their credit resources in favor of large enterprises. Accordingly, the loan demand of small and medium-sized enterprises is certainly neglected to some extent, which in turn aggravates their financing difficulty.

Undeniably, the tight monetary policy has somewhat limited the credit supply capacity of banks. This has increased the financing difficulty and cost for small and medium-sized enterprises and produced unfavorable impacts on their financing. But the following basic facts do not support the argument that the current monetary policy is the most important factor that contributes to the financing difficulty of small and medium-sized enterprises.

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