Bankers call for SME funding reform

PUBLISHED : Wednesday, 03 April, 2013, 12:00am
UPDATED : Wednesday, 03 April, 2013, 3:28am

The country's newly appointed financial regulators should do more to help small, privately held companies raise money, rather than come to the aid of large state-owned enterprises, say leading bankers.

Chu Gang, head of capital markets at home-grown investment bank China International Capital Corporation (CICC), said small and medium-sized enterprises (SMEs) are facing greater financing difficulties.

In comparison, said Chu, big state-owned enterprises, especially banks and energy firms, have expanded rapidly by way of fund-raising through public channels, in particular initial public offerings, thanks to Beijing's policy support.

He said that the playing field should be levelled for private companies through additional administrative measures and policies designed to support SMEs seeking funding in the capital markets.

This is all the more imperative, he said, as the country has pledged to aid the development of SMEs, which could play a crucial role in promoting economic growth, increasing government revenue and creating jobs.

Unlike large state-owned enterprises, small privately held companies find it difficult to source funding for expansion, partly because the current banking system favours lending to government-backed companies, which are believed to be a safer bet with lower default rates.

Yet SMEs - businesses with fewer than 2,000 people on their payrolls, by official definition - have ballooned to number more than 60 million today, generating 60 per cent of China's gross domestic product and contributing more than half of the country's total tax revenues.

"The domestic financing landscape is gradually changing in favour of private companies, such as those in the internet and e-commence industries, which can respond faster to reforms," said Chu, who joined CICC in May 2009.

CICC is led by Levin Zhu, the son of former premier Zhu Rongji, who was widely considered a pro-market reformer. During his term as premier, Zhu was a strong advocate of breaking up state-owned enterprise monopolies in sectors as such banking and telecommunications.

Chu, a physicist-turned-banker, said that even though the biggest Chinese companies are still controlled by the state - especially in capital-intensive industries such as telecommunications, mining and steel - that should change as the authorities are trying to make businesses less reliant on bank loans and more capable of raising money in the capital markets.

China's state-controlled mega corporations are becoming increasingly visible globally but are understood to lack the creativity and innovation required to drive the world's second-largest economy into its next phrase of growth.

According to the Asian Development Bank, the average life span of Chinese SMEs is 3.7 years, less than half the 8.2-year life expectancy of their counterparts in the US and a reflection of the obstructions they face doing business in their home country.

"The truth is, China needs to open up its capital markets further to foreign competition. But the systems and policies remain undeveloped," said a Beijing-based senior executive at a foreign investment bank who did not wish to be named.

The government has shown signs that it is aware of the problem of SME financing. Beijing is trying to reform the over-the-counter listing programme that was established to help the mainland's fast-growing high-tech start-ups raise cash, but the "overall effect remains disappointing", said the banker.