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SME financing in China
Université Paris X-Nanterre
Maison Max Weber (bâtiments K et G)200, Avenue de la République
tving
92001 NANTERRE CEDEX
Document de Travail Working Paper
2007-29
Chen Xiang LIU
E c o n o
m i X economix.u-paris10.fr/
SME Financing in China
conceptLIU Chen Xiang
Université Paris X-Nanterre王冠 美剧
EconomiX (CNRS-UMR 7166)
utilizingBâtiment K-115
新东方唐静200, Avenue de la République
92001 Nanterre Cedex
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SME Financing in China
LIU Chen Xiang
Abstract
SMEs have a great contribution in China’s economic expansion. However, the financing predicament currently faced by SMEs constitutes a great bottleneck for their development. Banks are reluctant to lend to them, mainly due to the lack of collateral and their poor capability in pricing risk. This is the reason why credit guarantee institutions play a key role in SME financing and the perfection of the credit guarantee system is important for promoting their access to credit. In addition, the lifting of the ceiling on lending rates as well as other steps taken by banking authorities will encourage bank lending to SMEs. Finally, informal finance has a significant part in SME financing.
Résumé
Les PME ont une grande contribution à la croissance chinoi. Pourtant, leur difficulté de financement devient un grand obstacle dans leur développement. Les banques ne veulent pas leur prêter, principalement à cau de manque de collatéraux et la faible compétence des banques pour évaluer le risque de crédit. C’est la raison pour laquelle les organismes de garantie jouent un rôle indispensable dans le financement de PME et le perfectionnement du système de garantie est important pour augmenter leur accès aux crédits. En plus, l’enlèvement du plafond de taux d’intérêt de crédits ainsi que les autres mesures pris par les autorités bancaires vont encourager les prêts bancaires aux PME. Enfin, la finance informelle a une part significative dans le financement de PME.
Key Words: SME financing, credit guarantee, informal finance
gatewayJEL Classification: E26, E51, G21, O53
1. Introduction
The scope of private ownership has become substantial, producing well over half of GDP and an overwhelming share of exports-imports. Private companies generate most new jobs and are improving the productivity and profitability of the whole economy. The continued re-orientation of the economy towards the private ctor brings considerable gains to real incomes and macro-economic
activity. It should be noted that all companies which are controlled neither by state nor by collective shareholders are considered as private companies; 98% of enterpris in non-public ctor are SMEs (small and medium sized enterpris), and 98% of SMEs are in non-public ctor.
The changes in government polices explain importantly the emergence of a powerful private ctor in the economy. In 2005, regulations that prevented privately-owned companies entering a number of ctors of the economy, such as infrastructure, public utilities and financial rvices were abolished. However, SMEs have always limited access to credits, which hinders heavily their business’ expansion and thus their healthy development. Why banks are reluctant to lend to them and how they have fallen into financing difficulties? How to resolve their financing problems and who can rve as their main supporters? This paper tries to respond to the questions and to draw the best SME financing rvice system.
cavatinasoftrockThe paper begins by evaluating the position of SMEs in the real economy as a whole and highlighting issues facing SME financing. The following ction discuss formal finance’s support for SMEs, emphasizing the role of credit guarantee institutions. Ultimately, the paper prents informal finance’s development and outlines its influences on SME financing.
2. The private ctor—a major driving force in economic expansion
China’s private ctor has become its main driver of economic growth. In 2005, there were more than 40 million SMEs and sole industrial & commercial proprietorships (getihu enterpris), accounting for 99.6% of the total number of enterpris. They were responsible for as much as 59% of GDP. They accounted for 60% of sales value and reprented 68.65% of imports & exports. They paid 48.2% of taxes, and occupied more than 75% of employment in urban areas. The regions with which SME cooperate have extended from Hong Kong & Macao to some developed countries, such as United States and Italy.
The growth in private output has been the result of the higher productivity of most companies in this ctor. The sharper incentives facing the private ctor companies have resulted in them using less capital and labour to produce output than state companies. Overall, the aggregate productivity of private companies in the industrial ctor is estimated to be almost twice that of enterpris controlled directly by the state. The profitability of private companies has also rin considerably, and the rate of return on physical asts was double that of state controlled companies in certain provinces in 2005. Such a high level of competitiveness has resulted in the private ctor accounting for more than two-thirds of all exports in 2005. While the bulk of the exports are made by foreign-controlled companies, the domestically-owned private ctor is increasing its exports, as more small and medium-sized enterpris are granted export licences. (OECD, 2005).
The private ctor plays a key role in a largely market-oriented economy owing to the changes in government polices. Government authorities have recognized the importance of the private ctor for economic growth and job creation, and have moved to reduce a number of barriers that limit its expansion and to promote its equal treatment with publicly-owned ctors. On February 2005, the State Council issued “Guidelines on Encouraging and Supporting the Development of the Non Public Sector including Individual and Private Enterpris” that include 36 articles for improving the operating environment for private business. The new guidelines give much-improved market access to private companies in many industries that were previously restricted, including tho that are dominated by state monopolies and heavily regulated ctors such as public utilities, financial rvices, social rvices and national defence. The directives also mandate equal treatment of private and public business, calling for rescinding of rules that discriminate against private companies and direct ministries and local governments to carry out implementation of the new constitutional amendment guaranteeing private property rights. In terms of access to financing, the new guidelines direct financial regulators to expand access to bank, equity and bond financing, through pro-active treatment of private companies under the interest rate liberalisation, and through impartial treatment of private companies in capital market access. A subquent survey by the All-China Federation of Industry and Commerce showed that entrepreneurs cited the new market entry and financing access articles to be the most important.
