• Tue
  • Dec 23, 2014
  • Updated: 2:20am

Central cabinet outlines measures to ease SME financing costs

PUBLISHED : Friday, 15 August, 2014, 1:09am
UPDATED : Wednesday, 20 August, 2014, 10:19pm

The central cabinet has issued a guideline detailing measures outlined at a July meeting to ease funding bottlenecks for companies, particularly smaller ones.

The State Council document, dated August 5 but posted on its website yesterday, came a day after the central bank reported sharply lower credit data. Total social financing tumbled to almost a six-year low last month, fuelling slowdown concerns.

As "downside pressures remain large" in the economy, the cabinet said it was important to ease high financing costs. While large, state-owned enterprises can take out loans at 5.8 per cent interest, borrowing costs for smaller firms can be as high as 17 per cent.

It added the central bank should keep liquidity "steady and appropriate", ensure good implementation of targeted reserve requirement ratio cuts, and increase lending to areas such as shanty town renovation, railways, services and energy saving.

New yuan loans slumped to 385.2 billion yuan (HK$484.8 billion) in July from June's 1.08 trillion yuan due to seasonal factors, but also reflected sluggish industrial demand and banks' caution on rising bad loans, analysts said.

"More policy easing is unavoidable and lowering the financing cost of the economy is the top priority" for the central bank as Beijing remains keen to achieve a growth rate around 7.5 per cent, said Barclays Capital economist Chang Jian.

The State Council said it would cut the weighting of deposits and asset size in banks' performance evaluation to discourage them from purely chasing scale and profits, in a bid to guide them to channel loans to the weaker areas of the economy.

Authorities should expand financing channels for banks and other institutions, including pushing forward securitisation backed by credit assets, and roll out "as soon as possible" internet finance regulations, it added.

The government will also expand the scope of tax cuts for long-term fund investments in the capital market and lower the threshold for banks to issue financial debts targeting small and rural companies.

Companies that belong to industries with excessive capacity but are run profitably will receive differentiated treatment, the guideline said, implying that lending curbs to such businesses might be loosened.

It reiterated the government would "orderly" push forward interest rate reforms, without elaborating.


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In Czech Republic, the privatization of their SOEs was done in the following way.
‘Privatised Coupons’ (PCs) were issued to the citizens of the country, to evenly distribute the SOEs’ assets to them.
Their citizens can directly buy the shares of the SOEs, or they can use their PCs to invest in the investment funds, and become part of the funds’ shareholders.
The funds then use the PCs to buy the shares of the SOEs, gets the returns and gives dividends to the fund owners.
This country’s privatization efforts were complete, without leaving behind any national shares.
There were also no Russian-like oligarchs left over.
She became the second country in Eastern Europe to recover economically, after Poland.
In Poland, employee buyouts (EBO) gradually transformed into management-and-employee buyouts (MEBO) and management buyouts (MBO), which took quite a long time.
The factors of production thus gradually concentrated on the hands of the capable managers, enabling the outputs of their enterprises to be maximized.
(Chinese readers: ****blog.163.com/xin_lijian/blog/static/4677157020147188341474/)
Similar PC arrangement can be considered in China to turn the country's farmland, residence and collective land in the rural villages into privately-owned land, thereby releasing the other half of the country's massive potential wealth.
If similar privatizations can be done in China, their citizens will become wealthier than before, and will spend more and help balance the economy.
This is one way to solve the problem of 'rich country, poor people'.
As a result of more even distribution of income and wealth, the country will become much more politically stable than before.
Like magic, those Chinese managers and workers will behave in a completely different way.
Once privatised, the original SOEs will all be efficiently run, strive to innovate, and lower their costs of production and wastages --- there will be no more Sangong.
Their increased retained earnings will also mean much less further fund-raising needs both in the share and credit markets.
The share market will then be more healthy, and keep on its rising trend, and there will be much less crowding-out of SMMiEs in the credit market.
The local governments, now with much more company tax profits than before, will rely less and less on land finance.
The market interest rates will go back to normalcy.
With a gradual development of a sophisticated multi-tier capital market, some of the SMMiEs will become China's Google and Apple.
Well-known Chinese global brands will gradually prop up in the world market.
The country can then gradually earn the true respect of the foreigners.
To get, we must give first --- that's the meaning of good investment.
This is most probably one of the best investments the Chinese authority can make right now.
The present anti-trust law mainly against the foreign enterprises cannot make China's domestic enterprises more competitive.
Protectionism cannot propel the Chinese enterprises to the world-class status.
Only fierce competition between the privately-owned Chinese enterprises can enable some of them to become truly successful enterprises in the world market.
As part of the country's privatisation efforts, the Chinese authority must start to well protect the intellectual property rights in the country.
Some of the Chinese citizens must not continue to steal the intellectual properties of the foreigners, or their own innovations will also be stolen or copied by others and as a result no important Chinese innovations will prop up in the future.
To enable the citizens to be more innovative, much more money has to be spent on the schools and teachers.
The students should be encouraged to think creatively, not just asked to memorise the mathematical formulae or historical facts.
Rote memorisation, as has been practised in Japan, no longer work in the future information and globalised age.
As shown by the country's rising foreign reserves, there's no way the foreigners will sell advanced technologies to China.
So, China should cultivate her own talents and her own SMEs, because, as reflected by the world's past experiences, only the best talents from the best SMEs have been able to develop highly-creative advanced technologies.
(Chinese book: "Two mirrors of Taiwan")
Remember the film ‘Alien 2’ ?
Near the end of the film, the horrendous alien mother was constantly laying eggs which gave birth to many alien descendants, who kept on harming the human beings.
Only by killing the alien mother, or greatly suppressing her, could the ordeal really end.
Now in China, there exists a similar alien mother --- limited and improper private property rights delimitation and enforcement, or the widespread prevalence of common property rights.
This phenomenon, together with its accompanying spectre, the Tragedy of the Commons, is forever haunting and hurting the country, at least economically.
Take China’s almost-daily airport flight delays.
This problem always happens in China, but not as often in the other countries.
Certainly China’s busiest airports are not more busy than their busiest foreign counterparts.
In principle, reducing the waiting time can greatly boost the airports' profits, but the profits do not belong to the airport managers in charge.
The airports are not wholly privately owned, instead they are publicly owned, even though some of them are listed in the stock market.
As a result, those managers can care more about their own “profits”.
Instead of maximizing the airports' profits, they maximize their own managerial utility.
One way is to artificially create the needs to wait in line.
This way, the listed airlines have to depend on the mercy of the airport managers, and the latter can therefore gain from this arrangement.
It goes without saying that almost all other commonly-owned enterprises in the country are artificially creating similar ‘waiting-lines’.
The bank managers will set the lending rates (much) below the free-market rates, otherwise, who will come to beg them for mercy and how can they discriminate among the competing borrowers ?
One result is that, one enterprise in China, after giving 'gifts' (a total of 9.72 million yuan within 5 years) to the managers of a certain bank, was still able to get a banking loan of 17 million yuan from the bank, ten days before the declaration of bankruptcy of the enterprise !
We are talking about interest rate liberalization almost daily.
Problem is, given the mostly commonly-owned banks in China, no genuine interest rate liberalization can ever be accomplished.
This is simply mission impossible, especially if we also consider the country's SOEs and local governments which all tend to borrow money in the market at all costs.
Some money raised by the trust loans is not used by the borrowing firm, but go to the private purse.
But, will the boss of a privately-owned enterprise receive the gift in a similar way ?
The profit of the enterprise belongs mostly to the boss, will he or she be so foolish as to accept the gift and so forsake the much greater profit that could have been accrued to him or her ?
Getting 9.72 million yuan in order to lose 17 million yuan ?
(Chinese readers: ****finance.ifeng.com/a/20140815/12931430_0.shtml)
Similarly, we talk about innovation almost daily in China.
By now, you should know why a mostly commonly-owned country has no way to become genuinely innovative.
What’s the point of lowering the cost of operation of the enterprise, or introducing a new product or service to the market, if the managers themselves cannot fully reap part of the subsequent rise in profits ?
That’s why, even though they are being heavily subsidized by the central and local governments, the country’s central and local SOEs still cannot produce world-brand competitive products or services in the global markets.
Those extremely profitable Chinese SOEs (including the policy banks) are so profitable not because they are innovative or are efficiently managed, but because they are government-protected monopolies or oligopolies in their own markets.
Those SOEs usually demand for loans in the market at all costs, because their managers will not be hurt by the drop in profits of their enterprises --- the loss belongs ultimately to the government.
In other words, the country's taxpayers have to ultimately pay the price of their irresponsible borrowing behaviour, while those managers are able to get all the benefits resulting from their selfish behaviour.
The potential benefits accrue only to the stakeholders, while the cost is borne and shared by all the other people.
Without killing the alien mother, all her nurturing offsprings will continue to be active and lively and cannot be easily subdued.
“Sangong,” or three public expenditures, refers to public money spent on official receptions, vehicles and overseas travel.
Taxpayers have long viewed this spending as sources of corruption and waste, allowing officials to misuse public funds for international travel, lavish banquets and government cars driven for private purposes.
In December, the government started a campaign to trim such fat.
The National Audit Office looked over the books of 38 central departments and found 80 percent of them have problems with their sangong spending.
The State Oceanic Administration, for example, was found to have spent six days in France and Chile during a 13-day trip to visit Chinese researchers in the Antarctic in 2012.
Also, the China Geological Survey Bureau took an excursion to Las Vegas while in the United States to survey shale gas exploration in 2013.
The team lied about the trip, saying they were in Canada doing their job.
Now you know why many of the country's fresh university graduates all want to work in the country's government departments and SOEs.
The crowding-out effect occurs not only in the country's banking-loan sector but in her talent sector as well.
This increases the costs of hiring talents by the private sectors.
The above doesn’t imply the Chinese government officials and managers in the SOEs are particularly pernicious and more harmful to the society than their foreign counterparts in the other countries.
People are people, they are just intending their own gains, in their own particular environment, like everyone else.
If you and I were the Chinese officials or managers, we‘d probably do the same things as well, if not more.
Economics can be summarized in two words --- constrained maximization.
People naturally maximize whatever they want to maximize, subject to the relevant constraints facing them.
This means the coming reforms in China need to change the objectives their people maximize by changing the relevant constraints facing them, so as to change their incentive and behaviour, and benefit the country as a result.
Reverse coercion (倒 迫) (alone) cannot effectively force them to change.
We all know the concept of creative destruction.
The best chance props up when the danger is closest.
The Chinese word for crisis is 'danger-chance'.
We don’t need Warren Buffet to tell us this is the case.
For only when there is a crisis can the vested interests be forced to forsake the present arrangements, because they themselves will also suffer great losses if the present arrangements persist.
The best way to survive from the crisis is to innovate, to change the old habits, and do things in a new way.
Only when there is an economic environment that can provide enough incentive to innovate can the economy find a new growing point, and circumvent the original die-hard path-dependent arrangements.
Only when there is a mainly privately-owned economy will the people have the incentive to strive to innovate and gain from it.
And only when private property rights are well delineated, protected and enforced can they reap and keep the benefits of change, and so strive to change and innovate, with a happy and most important byproduct --- the whole society is also tremendously benefited as a result.
Believe it or not, only people's own self-interest, the one and only most dependable thing under the sun, properly and legally guided, can make a country great, not the sincerity of her government officials, if any.
More often than not, the road to hell is paved with sincerity.
'As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value;
every individual necessarily labours to render the annual revenue of the society as great as he can.
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign industry, he intends only his own security;
and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it.
By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.'
("An Inquiry into the Nature and Causes of the Wealth of Nations par. IV.2.9.")




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