Analysis: Forced lending to China SMEs may risk more harm than good

Tue Nov 19, 2013 4:07am EST
 
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By Pete Sweeney and Gabriel Wildau

SHANGHAI/WENZHOU, China (Reuters) - Beijing's strategy to reroute money away from state-owned giants towards smaller firms to help fuel the economic transformation behind its reform plans is less of a success than it may seem on the surface.

Lending has increased in line with Beijing's 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 Beijing is trying to consolidate, aggravating the risks facing the financial sector rather than alleviating them.

Some lending is even being routed to real estate, a market Beijing 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 enterprises, there hasn't been a substantive improvement," said Ye Xixi, director of the finance department at Wenzhou University City College, whose research focuses on small-and-medium enterprise (SME) financing.

"In fact, in recent years there are 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.   Continued...

 
A worker wearing a mask pulls a cart loaded with limestone at a mill in Quzhou, Zhejiang province October 22, 2013. Beijing's strategy to reroute money away from state-owned giants towards smaller firms to help fuel the economic transformation behind its reform plans is less of a success than it may seem on the surface. Picture taken October 22. REUTERS/William Hong