China moves to back rural SMEs
China has moved to shore up financing guarantees for small businesses and the rural sector in an acknowledgement of their importance to the economy.
Over the past decades China has seen a population shift from the countryside to the cities where wages are higher, leading to a decline in the contribution of agriculture to gross domestic product. Yet the rural economy still accounts for a disproportionate number of workers. Add in small businesses, which also tend to be labour-intensive, and these areas do the heavy lifting on employment.
Enter the State Council, which has moved to set up provincial level re-guarantee companies to shore up financing for the credit guarantee firms that are supposed to help small business access capital in the absence of significant collateral. Solving the difficulties of small enterprises and rural firms is an "important measure towards improving targeted macroeconomic policy, promoting business and innovation among people, supporting rural groups as cells within the real economy and achieving a solid basis for the economy," the State Council said of last week's move.
Small and micro enterprises and rural companies are starved of credit in China, partly due to the small scale at which they borrow and partly due to their lack of collateral. Many are forced to guarantee each other, creating local rings of mutually guar- anteed firms that can cause financial instability if one fails.
The guarantee companies that sprang up to help them access loans are themselves poorly capitalised and often ill-equipped to survive defaults. Banks that enjoy greater capital strength still view loans to stateowned groups as less risky.
"Almost a decade after restructuring, state banks have yet to make real progress at commercialising activities. Their lending decisions are still largely based on perceived guarantees and collateral, rather than the intrinsic creditworthiness and cash flow generation capacity of borrowers," the World Bank said in its July China Economic Update.
Lending to small enterprises totalled Rmb16.2 trillion (Dh9.5 trillion) by the end of June, equal to 30 per cent of outstanding corporate loans, according to central bank data. Rural loans totalled Rmb20.7tn, or 22 per cent of all outstanding loans. Only Rmb3.5tn of that total was for agricultural loans, with the rest mostly flowing to rural mortgages and non-agricultural firms in rural areas.
Small enterprises accounted for 150m jobs by the end of 2013, equal to nearly a fifth of total employment, according to official figures. For industrial companies, those with fewer than 300 employees or Rmb20m in annual revenue fall into this category. Together with medium-sized enterprises, small enterprises account for 60 per cent of GDP, 50 per cent of tax revenue, and 80 per cent of urban employment.
Despite its shrinking share of the economy, agriculture remains crucial to jobs, employing 228m last year. China's bank regulator has decreed that rural and small enterprise loans must grow faster than total loans each year, but bankers say there are ways to disguise loans to local governments or large firms and rural or small enterprise loans to meet this quota, casting doubt on the figures. "In fact, rural area businesses find it hard to get loans, and for farmers, it's even harder," says analyst Ma Wenfeng of Beijing Orient Agribusiness Consultants. "If rural lending takes place under the same conditions as city lending, banks are even less willing. The returns are much smaller."