China's banking regulator issued a directive yesterday urging banks to increase lending to small enterprises, which have been disproportionately affected by government curbs on credit. Mainland banks have huge piles of cash to lend out thanks to a booming economy, limited alternative investments and traditionally high savings rates. But surging fixed-asset investment rates last year prompted Beijing to crack down on indiscriminate lending in property, basic metals and construction. Many banks reined in all lending to avoid conflict with the authorities. 'Small and medium-sized enterprises are the fastest-growing and largest part of the Chinese economy but haven't received a substantial amount of bank lending in the past,' said CLSA China macro strategist Andy Rothman. The largely state-owned banking system has traditionally provided a steady stream of cheap credit to state-owned enterprises and large corporations. But smaller businesses complain of difficulty in securing even basic loans, especially since government liquidity tightening measures were introduced in the first half of last year. Beijing had hoped that the measures would nudge the economy away the gigantism that has characterised the country's development over the past two decades but until now it has failed to ensure that credit found its way to smaller, more entrepreneurial businesses. 'It's about rebalancing the economy away from state-dominated giants towards a more diversified mix associated with developing a bigger service sector and more consumer activity,' said David Marshall, head of Asian financial institutions at Fitch Ratings. Lending to smaller businesses has traditionally been avoided in part because banks were ill-equipped to assess the potential for default. 'Banks need to have the ability to assess risks and price their loans appropriately,' said Mr Marshall. 'The small enterprise market will be a very profitable business for the banks but we will have to be very wary of the risks,' said Bank of Communications' planning and development manager Zhou Kunping. Until interest rates were liberalised in October last year, banks were not allowed to set rates above a certain ceiling. They are now able charge higher rates to compensate for the risk of lending to smaller companies. The risk remains that inexperienced banks will under-price their loans, resulting in a resurgence of non-performing loans in a banking sector struggling to emerge from a legacy of bad debt.
