SMEs continue to hit a brick wall on financing

Standard Chartered study reveals smaller firms still struggle with bank lending, despite strong overall performance

PUBLISHED : Thursday, 28 July, 2016, 4:08pm
UPDATED : Thursday, 28 July, 2016, 5:56pm

Chinese small- and medium-sized businesses (SMEs) are finding it increasingly hard to get funding, despite signs of moderate improvement in their activities, according to a latest report from Standard Chartered.

Overall credit conditions for SMEs continued to deteriorate, said Lan Shen, the bank’s China economist, after its index tracking the situation dropped to 52.3 in July from 52.8 in June, the lowest reading since October 2014.

Bank loans especially are becoming more difficult to obtain, illustrated by the figures measuring banks’ attitudes to lending to SMEs, which dropping to 54.2, the lowest since the start of the year.

The study suggests that not only are financing channels narrowing for SMEs, the overall burden of servicing existing debt is also surging, with bank financing costs rising sharply in July, while non-bank financing costs also rose.

The Chinese government has acknowledged the issue.

“This has become one of the most acute problems faced by Chinese companies,” said Xu Kunlin, head of investment department of China’s top economic planner NDRC, this week.

“When companies can’t get bank loans or have difficulty in rolling over old bank loans, they have no choice but to resort to other financing channels with even higher cost. That’s how conditions worsen in many companies,” added Xu.

Since the start of the year, China’s credit conditions have been relatively loose.

Total social financing, the broader measure of credit in the economy, beat market expectation with an increase of 1.6 trillion yuan (HK$1.86) in June. Chinese banks granted a total of 7.5 trillion yuan in new loans. during the first six months of 2016.

The Standard Chartered figures also show credit conditions did improve slightly in June, after a short setback in May, with the index tracking the situation actually rising to a five-year high.

However, not enough liquidity has started filtering into the real economy, it said.

A People’s Bank of China official said recently that China’s monetary policy is facing a “liquidity trap”, with increasing money supply failing to boost investment or lower interest rates.

Huang Yiping, a PBoC advisor, said the financing difficulties SMEs were facing could partly be attributed to the fact Chinese banks still don’t have full freedom to set their own interest rates based on risks premiums.

“SMEs present more risk than large companies, so banks would be reluctant to lend to them if they don’t have the freedom to set higher interest rates on loans,” said Huang earlier this month.

Xu Kunlin suggested the key to addressing that problem, particularly, is “ to promote direct financing, which is expected to provide more efficient and cheaper financing”.

SMEs present more risk than large companies, so banks would be reluctant to lend to them if they don’t have the freedom to set higher interest rates on loans
Huang Yiping, PBoC advisor

Standard Chartered economist Lan added: “We expect the authorities to maintain ample liquidity to contain funding costs.

“We believe they will resort to fiscal policy measures to reduce SMEs’ financing burden and support their activity.”

Despite the challenging credit conditions, SMEs still managed to achieve moderate, stable performances, with domestic demand remaining resilient, said the study.

The SMEI index, which Standard Chartered uses to track SME activity in China, edged up to 55.5 in July from 55.2 in the previous month, ending two consecutive months of decline.

Their demand has started to pick up slightly, while investment also accelerated in July.

The reading for fixed asset investment climbed to 56.1 in July from 54.1 in June, and the three-month investment expectations index also edged higher, suggesting a revived appetite for expansion among SMEs, said the report.

Sounding a cautionary note, however, the study highlighted that external demand softened in July, with the reading for new export orders falling to 53.0 in July from 54.1 in June.