Banking & Finance

Don’t bank on it

Small businesses are getting the credit cold-shoulder

Ready to be loaned, but only if you're big enough (and state-owned)

A man suffering from an excess of lice will soon stop itching, predicts the Chinese proverb, just as a borrower with too much debt gets less worried about repaying it.

It is a scenario that a few of China’s small businessmen might well be prepared to endure. Better than the current situation, perhaps, in which the scratching around is more about finding credit than paying it down. Unable to convince banks to lend, thousands of small businesses have already gone to the wall.

This battle for bank loans might look a little counter-intuitive. After all, isn’t this a lending environment in which new credit growth is off the charts? At least Rmb1.2 trillion ($175 billion) a month of new loans were made available in the first six months of the year, HSBC reports.

But the issue is less about the amount of money being lent (although some predict a storm of non-performing debt ahead) and more a matter of who is being permitted to borrow it. In particular, small-and-medium sized enterprises (SMEs) say that they are missing out as Chinese banks choose to concentrate their lending to larger companies.

There are at least 42 million SME firms nationwide, says the China Daily, which defines an SME as a business with less than 2,000 staff, annual revenues under Rmb300 million, or total assets under Rmb400 million.

But together, they aggregate into something far more significant, generating at least 60% of China’s GDP growth, more than 50% of its tax revenue and more than 80% of its urban employment.

This contribution looks more than a little unappreciated, if the latest lending figures are an indicator. Small firms have received only 8.5% of the Rmb7.3 trillion of credit made available in the first half of the year, says Li Lianzhong, head of research at the Central Policy Research Office. That’s surprising for a central government normally so focused on promoting growth and jobs. A sector that continues to receive less than a tenth of a country’s credit cannot be expected to generate six tenths of its economic growth.

The struggle for bank finance is not a new problem for smaller borrowers. But the global economic slowdown has made it a deadlier one; at least 670,000 firms have shut up shop in the last 18 months, says the China Daily. Working capital crunches are a lead factor, but loans of as little as Rmb200,000 ($29,000) would have kept many in business, the newspaper reports.

The State Council has promised to address the situation, and released a policy statement this week. Alongside some rather vague commitments to levelling the playing field for smaller firms, there was a promise of $1.4 billion in R&D subsidies, a temporary holiday on social security payments, and tax breaks for the smallest businesses.

The measures are better than nothing. But they look a little cosmetic in terms of the sector at large, primarily because they do little to address the bigger issue of access to credit.

So are the state banks really the villains of the moment? This year’s credit explosion hardly reflects an institutional aversion to lending, after all.

But the big banks are much happier shoehorning credit into large state-owned clients, says the Beijing Review. Smaller, private businesses are getting much less of a look-in.

One problem for the lenders is that the policy environment has not kept up with the times. There is no credit rating standard for the SME sector, for instance, and little information sharing across the lender base. Regulations surrounding credit guarantees are still incomplete too. So bank officials look at the smaller clients and see risk rather than return.

Booming profits for the banking giants may make winning new business a less pressing concern. This is an institutional inertia that critics say can only be shifted through policy reform – and a first step is to create a new tier of banks with an interest in lending to small businesses.

In the current circumstances, calls for the creation of hundreds of new banks looks to be out of step with an international focus on consolidation. But the truth, says Yao Yang, a researcher at Peking University, is that the SME sector needs more banking options. There are 18,000 banks, loan-deposit associations, mutual saving and credit unions in the US but only 18 national banks in China, as well as 110-odd city-based smaller ones.

Another irony, perhaps; ‘Copy the Americans’ is hardly the refrain du jour among banking regulators. But Yao says policy must focus on the bigger picture and especially a China savings rate that significantly exceeds investment. This leads to an “abnormal” situation in which cash amounting to a tenth of GDP sits idle, even as small firms cry out for funds.

So, for smaller businesses, is it a question of pulling together the wagons and waiting for the credit cavalry to arrive? Liao Min, a spokesman for the China Banking Regulatory Commission, says 1,000 new small-and-medium-size banks will be up-and-running within three years. That looks like a suspiciously round number, and all in a pretty aggressive time frame too.

Still, things can happen fast in China. Although in this case, probably not fast enough, as far as thousands of small business owners are concerned.


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