Real money

Supply-side financial reforms are crucial to solving the financing problems for micro and small-sized enterprises

In the face of the complicated and grim economic situations at home and abroad, the Chinese economy is facing challenges. China should focus on key areas of the real economy and in particular the financial sector, since it plays an irreplaceable role in supporting the real economy and risk prevention. Reforms are needed in the financial sector to give full play to finance’s core functions, and to consolidate China’s economic stability and long-term prosperity.

The financing of private micro and smallsized enterprises should be a top priority. In China, private enterprises (most are micro and small-sized companies) contribute more than 80 percent of urban employment opportunities and over 90 percent of corporate legal entities. In addition, more than 80 million individual businesses are the main forces of innovation and entrepreneurship. These enterprises have a bearing on the overall economic situation and social stability. China has achieved positive results in promoting financial services for private and micro and small-sized enterprises in the initial phase.

However, their financial resources generally do not match the importance of the role they play in the economy. In the anti-pandemic fight, many of these micro and smallsized enterprises have been greatly affected with their ability to repay short-term loans decreasing and the risk of defaults and liquidity rising.

As this year’s Government Work Report stressed, while China is working to develop new monetary policy instruments that can directly stimulate the real economy, it is crucial to ensure smaller enterprises can secure loans more easily, and to promote the steady reduction of the interest rates for loans to micro and small-sized enterprises. Due to their characteristics, indirect financing from banks is still their main channel to obtain financial support and offset the impact of the pandemic.

In the short term, China should meet their capital needs and help them out of difficulties with various policies. One is to ensure that their overall credit growth will not be impacted by the pandemic, and give prioritized support to their resumption of work and production; the other is to provide necessary support for loan renewal, extension, expansion of the credit line, to relieve the financial expenditure and liquidity pressure on these enterprises.

It is a systematic project to solve the financing problems for micro and smallsized enterprises in the medium- and longterm. A stable and predictable policy environment should be set up to stabilize market players’ expectations. Banks should be encouraged to guide financial resources more accurately to small and micro enterprises.

The second priority should be financial services involving agriculture, rural communities and farmers. To secure a decisive victory in targeted poverty alleviation is crucial to realizing a well-off society in all aspects.

Last year, the banking industry achieved the goal of sustained growth of agriculturerelated loans, and the growth rate of inclusive agriculture-related loans were no lower than the average growth rate of various loans. About 99 percent of administrative villages in poverty-stricken areas have been covered by banks’ basic financial services, and the insurance service coverage in villages and towns has exceeded 98 percent. But China should continue to expand the coverage of basic financial services and facilitate the last mile connectivity of financial services, optimize the financial products and service model involving agriculture, rural areas and farmers, to prevent people from slipping back into poverty.

These two areas are the focuses of inclusive finance. It should be noted that small and medium-sized banks are the main suppliers of loans to micro and small-sized enterprises and rural financial services, and that these banks, especially local ones, have been impacted by the pandemic because of the characteristics of their business and customers. Thus, large banks should be more active in developing and promoting inclusive finance from the perspectives of their social responsibilities and strengths in resources.

Despite the impact of the pandemic, the financial market is generally stable. This is mainly due to the phased results of early supply-side structural reform of the financial sector and the efforts to prevent and resolve risks. In the meantime, the difficulties of the real economy are also reflected in the financial field. On the one hand, affected by the pandemic this year, overdue loans and defaults have increased, non-performing loans and credit risks have grown, and the healthy development of banks has been affected to some extent. On the other hand, some of the risks exposed by the pandemic need to be properly handled and resolved. Under the downward pressure on the economy, these are more difficult to deal with.

First, China should actively seek to resolve the risks. Continuous attention should be paid to the impact of changes in the pandemic situation. The government should develop emergency plans, and take timely response measures according to changes in the situation to prevent the spread of local risks.

Second, many historical risk problems were caused by inadequate corporate governance and deviation from the main business. Such risks are not exposed in an economic upturn. But in the current situation, the risks are more likely to appear. The fundamental solution is to reduce such risks by deepening reform.

Third, under the premise of normalized pandemic prevention and control, China should continue to take supply-side structural reform as the main task, remove institutional barriers, stimulate market players’ inner vitality and inject new development momentum with the help of the reform. The 11 financial reform measures announced by the Financial Stability and Development Committee under the State Council, which cover reforms in credit, banking, financing guarantee, startup board and the New Third Board, as well as bill financing mechanism, bonds, credit rating and other aspects, fully demonstrate the determination of the relevant authorities to advance supply-side structural reform in the financial sector.

The author is chairman of China Wealth Management 50 Forum and former president of the China Banking Regulatory Commission. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.

LI MIN / CHINA DAILY