Premier Wen Jiabao has urged stronger financial support for cash-strapped smaller businesses, amid reports that many small and medium-sized enterprises are facing bankruptcy due to credit tightening.
Wen (pictured) made the remarks during a visit to Wenzhou, a hub of private capitalism, in Zhejiang province on Monday and Tuesday, Xinhua reported.
Wen's visit follows reports that the free-wheeling city is grappling with a credit crunch that has sent dozens of firms bankrupt and prompted their owners to flee.
'Smaller enterprises should be a priority for bank credit support and enjoy more tax preferences from the government,' Wen said, adding that banks should set targets for loans to small companies, reduce their cost of credit and allow a higher non-performing loan ratio.
'Small businesses play an irreplaceable role in creating jobs and boosting economic growth,' he said. 'It is of overall and strategic significance to support their development.'
Small businesses, which create 80 per cent of the nation's jobs and produce 60 per cent of its industrial output, have long complained about difficulties in securing loans from state-owned banks.
In a campaign to tame inflation, the central government has taken measures since the middle of last year to curb lending and implemented other steps to curb liquidity. Small and medium-sized businesses are feeling the pinch because they have traditionally not had the same access to funding from the state-owned banks enjoyed by major state-owned enterprises.
Most small firms use inter-company funding, borrowing from relatives and friends. But some have to borrow from loan sharks or through a guarantee company, a kind of private lender, which often set sky-high interest rates, typically ranging between 15 per cent and 20 per cent a year, but in some cases, according to mainland media, hitting 100 per cent.
Charging interest at more than four times the official rate is illegal. Some economists have warned that the trillion-yuan underground banking market might threaten the country's financial stability.
Last week, Wenzhou stepped up measures to control private lending, capping interest rates for private lending at 1.3 times the central bank's benchmark rates, warning loan sharks against using violence to collect debts and ordering tighter controls on debtors trying to flee.
The government also ordered banks to meet a target of issuing 100 billion yuan (HK$122 billion) new loans to small companies this year and promised to deal thoroughly with the cases of bosses running away due to mounting debt.
Citing government data, Wenzhou Daily reported on Friday that private lending in the city had reached about 110 billion yuan, roughly 20 per cent of total bank loans in the region, and average annual interest rates have risen to 25.44 per cent, or nearly four times the benchmark one-year lending rate of 6.56 per cent.