China's drive to reroute money away from State-owned giants toward smaller firms to help fuel economic transformation has been less of a success so far than it may seem on the surface.
Lending has increased in line with government orders. But banks have found loopholes allowing them to lend to State-owned firms and some borrowers are local-government-owned, operating in saturated sectors that the central government wants to consolidate, aggravating the risks facing the financial sector rather than alleviating them.
Some lending is even being routed to real estate, a market the government is trying to cool as prices soar, one researcher said.
These factors highlight the struggle China faces in trying to reform its financial markets while preserving a dominant role for the State, a combination underlined by a 60-point reform plan to redraw China's economy and social fabric announced last week.
"Despite efforts for many years by every level of government to alleviate financing difficulties for small and medium-sized enterprises (SMEs), there hasn't been a substantive improvement," said Ye Xixi, director of the finance department at Wenzhou University City College, whose research focuses on SME financing.
"In fact, in recent years there have been signs it's getting worse."
Regulators classify SMEs differently. China's bank regulator, for example, says they are companies with assets of less than 10 million yuan ($1.6 million) or annual sales of less than 30 million yuan.
Regardless, economists estimate they account for 70 percent of China's output and create 80 percent of its jobs, so many reformers say it is these companies, not China's stable of massive but inefficient State champions, that should lead China's economy in the future.
The government wants nimble, innovative firms focused on selling services to domestic consumers to steer the economy away from its current credit-intensive, State-driven model.
"Demand for loans is heavy, but for a large portion of borrowers, lenders aren't willing to lend," said Xu Zhiqian, general manager of the Wenzhou Private Lending Service Centre, located in a zone testing financial reform. "They think the risk is too big."
Xu said only about half of the pool of funds made available by would-be lenders has been used for loans. Wenzhou made headlines in 2011 when a wave of local firms defaulted on informal loans, prompting local officials to warn that businesses would be decimated if the city was not thrown a credit lifeline.
Nationwide, official data shows that lending to SMEs has increased as ordered, but still accounts for just about one-fifth of all loans, small compared with the sector's economic output.
To be fair, lending to small businesses is a banker's nightmare: They are hard to appraise, light on assets and quick to capsize when economic winds change.
Source: Global Times
Lending has increased in line with government orders. But banks have found loopholes allowing them to lend to State-owned firms and some borrowers are local-government-owned, operating in saturated sectors that the central government wants to consolidate, aggravating the risks facing the financial sector rather than alleviating them.
Some lending is even being routed to real estate, a market the government is trying to cool as prices soar, one researcher said.
These factors highlight the struggle China faces in trying to reform its financial markets while preserving a dominant role for the State, a combination underlined by a 60-point reform plan to redraw China's economy and social fabric announced last week.
"Despite efforts for many years by every level of government to alleviate financing difficulties for small and medium-sized enterprises (SMEs), there hasn't been a substantive improvement," said Ye Xixi, director of the finance department at Wenzhou University City College, whose research focuses on SME financing.
"In fact, in recent years there have been signs it's getting worse."
Regulators classify SMEs differently. China's bank regulator, for example, says they are companies with assets of less than 10 million yuan ($1.6 million) or annual sales of less than 30 million yuan.
Regardless, economists estimate they account for 70 percent of China's output and create 80 percent of its jobs, so many reformers say it is these companies, not China's stable of massive but inefficient State champions, that should lead China's economy in the future.
The government wants nimble, innovative firms focused on selling services to domestic consumers to steer the economy away from its current credit-intensive, State-driven model.
"Demand for loans is heavy, but for a large portion of borrowers, lenders aren't willing to lend," said Xu Zhiqian, general manager of the Wenzhou Private Lending Service Centre, located in a zone testing financial reform. "They think the risk is too big."
Xu said only about half of the pool of funds made available by would-be lenders has been used for loans. Wenzhou made headlines in 2011 when a wave of local firms defaulted on informal loans, prompting local officials to warn that businesses would be decimated if the city was not thrown a credit lifeline.
Nationwide, official data shows that lending to SMEs has increased as ordered, but still accounts for just about one-fifth of all loans, small compared with the sector's economic output.
To be fair, lending to small businesses is a banker's nightmare: They are hard to appraise, light on assets and quick to capsize when economic winds change.
Source: Global Times
