Why China’s smaller businesses are struggling to access credit

In Shenzhen, across the now almost entirely sealed border with Hong Kong, things are returning to a kind of normal. After a first quarter in which the economy shrank by 6.8 per cent, the worst of the coronavirus induced downturn appears past.

And while most governments worry that a financial crisis will follow the economic shock the virus has forced upon the globe, China appears exempt from that fear. Both bankers and those who work in the world of non-bank “shadow” lending say overdue loans came down dramatically in March from the peak in February and demand for new loans is slowly returning.

That isn’t to say all is well. For example, Shenzhen is home to some of the most successful private firms in China, from drone maker DJI to insurer Ping An and Tencent, the second most valuable company in the country. 

But the city, which has long attracted the best and brightest from all parts of China, is also home to millions of small and medium-sized enterprises and these are having a much harder time recovering — in large part because state-owned banks don’t like to have too much to do with them.

“The banks are sloshing with funds and the [SMEs] are starving,” said Henry Ma of WeBank, a Tencent affiliate that lends to smaller companies.

The local government of Shenzhen is doing what it can to support the sector. The problem lies more with Beijing. China is slowly returning to normal but the normal that it is returning to is not that of more hopeful days, but of an earlier time.

That is not immediately obvious. The rhetoric from Beijing is still all about embracing SMEs that account for about 70 per cent of jobs. “The subject comes up every time the State Council meets,” said one political insider.

Five years ago, a spirit of experimentation led to the formation of thousands of peer-to-peer lenders and other businesses that extended credit to smaller companies. But a number of them proved to be frauds or pyramid schemes, and almost all died or were shuttered. But the distinction between the bad apples and legitimate microfinance organisations was never clearly made. And in killing the frauds, the get-rich-quick, and other Ponzi schemes, regulators have dealt a severe blow to all small business lenders.

In President Xi Jinping’s China, only the state-owned banks are really trusted by authorities. Meanwhile, the most obvious victims of the disappearance of such non-bank lenders are the smaller businesses that the largest state owned banks have never had an incentive to embrace. This is partly because banks can charge consumers market rates but are expected to give SMEs lower rates, which bankers say don’t reflect the risk.

In the past, risk-averse banks would fund the microfinance lenders instead and they, in turn, would lend money to SMEs, taking on the risk of default. But a combination of policies, from denying official licences to almost all such lenders to a regulation known as Document 141, has put a stop to this. That document, now more than two years old, requires state-owned credit guarantee companies to guarantee such transactions, which has had the knock-on effect of making it far more difficult for microlenders to support SMEs.

“The banks are no longer lending indirectly to the SMEs,” said the founder of one Shenzhen-based microfinance lender that provides credit to owners of SME businesses. “The deleveraging is creating a crisis for the SMEs and for microfinance institutions. Both need help.”

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In the main, the SMEs don’t deserve their reputation as risky borrowers. By the end of March, WeBank found just 1 per cent of loans were non-performing. By April, 90 per cent of borrowers were repaying their loans within 30 days. “It just shows how vibrant these SMEs are,” the founder said.

The plight of SMEs would be even more dire were it not for the credit businesses of Alibaba, Tencent (and the much lesser known Baidu business along the same lines). Recently, Beijing announced it was extending a limited number of consumer finance licences to these large groups, with a minimum of Rmb300bn in assets.

Meanwhile, executives at these big businesses have learnt to sing from the Beijing songbook. They have abandoned all talk of challenging the traditional system. “We work with financial institutions,” said one. “Our model has changed.”

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