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."

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