China’s small business lending push could equal US$418 billion in new loans, S&P Global says
- Lending push could lead to higher credit costs and weaker asset quality, but the affect on credit quality is limited
- Loans to micro and small businesses in China totalled about 9.36 trillion yuan at the end of 2018
Beijing’s efforts to boost the availability of capital to the country’s smallest businesses could generate as much as 2.8 trillion yuan (US$418 billion) in new loans if the nation’s banks meet the government’s target to increase business lending this year, according to S&P Global.
In March, Chinese Premier Li Keqiang called for the country’s biggest state-owned commercial banks to increase their loans to micro and small enterprises (MSE) by more than 30 per cent this year as China’s economic growth slows.
“Higher MSE lending will lead to higher credit costs and weaker asset quality. However, the impact on overall bank credit quality is limited,” Harry Hu, a S&P Global credit analyst, said in a research report. “Financial-inclusion MSE loans still make up a relatively small contribution to the banking sector's total loan portfolio, and the government is providing a number of supports to offset the burden.”
The rating agency estimated that loans to micro and small businesses in China totalled about 9.36 trillion yuan at the end of 2018.
S&P said that there has been some confusion about the policy because regulators in China use different definitions for “financial-inclusions MSEs” at different times for different purposes.
As an example, loans cannot be defined as a “financial-inclusion MSE loan” if a single bank’s credit line to the borrower exceeds 10 million yuan, according to S&P.
Micro businesses are defined generally worldwide as having less than 10 employees, while small businesses typically have less than 50 employees.
Medium-sized enterprises, as well as micro and small businesses, account for about 60 per cent of China’s gross domestic product, according to S&P.
“In our view, Chinese authorities believe more credit to the small and micro sector is very important to supporting overall growth,” Hu said.
S&P said that the country’s megabanks will have a “strong incentive” to meet the government’s targets and other commercial banks will be “close followers”.
Lending to the country’s smallest lenders has been gathering steam among China’s six biggest banks in recent years, increasing by 27 per cent to 2.41 trillion yuan last year, compared with 1.9 trillion in 2017, according to S&P.
In 2017, China’s top five biggest state-owned commercial banks established a special department to focus on increasing lending to small businesses and other banks have followed.
“We expect banks to have limited room to expand margins on MSE loans in general, even as they take on greater risk,” Hu said. “Indeed, regulators have requested a decrease in MSE loan interest rates, and banks seem to be complying.”
Hu noted that the average interest rate on a new MSE loan in the fourth quarter was 7.02 per cent, an 80 basis point decline from the first quarter of 2018, and the average rate declined further to 6.16 per cent in the first quarter of this year.
