China Herald: SME´s find it hard to get funding

January 31 is going to be a major test for the shadow banking in China, as a 3 billion RMB fund matures, without support of the larger banks. One of the main victims could be China´s SME, who had to turn to shadow banking as officials refused them funding, writes financial specialist Sara Hsu in the South China Morning Post.

Sara Hsu (co-authored with Andrew Collier):

What will happen to small business as China's economy slows? The country's small and medium-sized enterprises are an important part of the economy and even more integral to employment; they account for 60 per cent of gross domestic product but a full 82 per cent of employment. With China's GDP growth dropping from over 10 per cent three years ago to 7.5 per cent or below, SMEs are going to struggle, which could have a disastrous effect on China's future.

The biggest problem facing them is a shortage of capital. The five state-owned banks, which control half of all bank assets, are much happier lending to state firms because they are generally "too big to fail". Even the smaller city and commercial banks prefer local-government-backed companies to private enterprise...

Since the majority of the banking sector is owned by the central government in Beijing, including the state banks, they are well insulated from such liquidity shocks.

But not the shadow banks. Unless they are large or well-connected enough to have direct ties to Beijing, they are not going to avail themselves of central government protection.

There is a historical precedent for the failure of shadow banks in China. In 1989, regulators shuttered dozens of Wenzhou money houses or converted them to urban credit co-operative banks.

Ten years later, suffering from growing bad loans, 18,000 rural co-operative foundations were either closed or taken over by a new group called Rural Credit Co-operatives, with much of the debt ending up back in the hands of the local governments. Such actions were prudent in light of weak lending controls and inadequate capital. But it also meant small business lost an important source of credit.

The regulators, including the People's Bank of China and the China Banking Regulatory Commission, are aware of the risks. They are doing their best to push the official banks to lend to SMEs.

In 2010, following orders from Beijing, SME loans jumped 34 per cent compared with a 20 per cent rise in total lending, according to Moody's.

And last July, the authorities approved additional measures requiring state banks to lend to small businesses and provided new support for village and township banks.

But all this may be in vain if China faces a new credit crunch. Like starving wheat during a drought, a crisis could lead thousands of small business to shrivel and die. It happened in Japan in the 1990s, again in the US during the mortgage crisis, and it could happen in China.

More in the South China Morning Post.

Sara Hsu is a speaker at the China Speakers Bureau. Do you need her at your meeting or conference? Do get in touch or fill in our speakers´request form.

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+Sara Hsu joined the +China Weekly Hangout on August 30 to explain how shadow banking in China works out, how big it is, and what the dangers are for China.