法国essay范文-essay sample-essay writing-SME financing in China Université Paris X-Nanterre-essay sample write essay essay example free essay essay writing essay范文 argument essay english essay globalization essaySME financing in China Université Paris X-NanterreMaison Max Weber (bâtiments K et G)200, Avenue de la République92001 NANTERRE CEDEXTél et Fax : 33.(0)220.127.116.11.07Document de TravailWorking Paper2007-29Chen Xiang LIUEconomiXUniversité Paris X NanterreUMR 7166 CNRS1SME Financing in ChinaLIU Chen XiangUniversité Paris X-NanterreEconomiX (CNRS-UMR 7166)Bâtiment K-115200, Avenue de la République92001 Nanterre CedexTél : 01.40.97.59.10Fax : 01.40.97.59.102SME Financing in ChinaLIU Chen XiangAbstractSMEs have a great contribution in China’s economic expansion. However, the financingpredicament currently faced by SMEs constitutes a great bottleneck for their development. Banksare reluctant to lend to them, mainly due to the lack of collateral and their poor capability inpricing risk. This is the reason why credit guarantee institutions play a key role in SME financingand the perfection of the credit guarantee system is important for promoting their access to credit.In addition, the lifting of the ceiling on lending rates as well as other steps taken by bankingauthorities will encourage bank lending to SMEs. Finally, informal finance has a significant partin SME financingRésuméLes PME ont une grande contribution à la croissance chinoise. Pourtant, leur difficulté de financement devient un grand obstacle dans leur développement. Les banques ne veulent pas leurprêter, principalement à cause de manque de collatéraux et la faible compétence des banquespour évaluer le risque de crédit. C’est la raison pour laquelle les organismes de garantie jouentun rôle indispensable dans le financement de PME et le perfectionnement du système de garantieest important pour augmenter leur accès aux crédits. En plus, l’enlèvement du plafond de tauxd’intérêt de crédits ainsi que les autres mesures prises par les autorités bancaires vontencourager les prêts bancaires aux PME. Enfin, la finance informelle a une part significativedans le financement de PME.Key Words: SME financing, credit guarantee, informal finance#p#分页标题#e#
31. IntroductionThe scope of private ownership has become substantial, producing well over half of GDPand an overwhelming share of exports-imports. Private companies generate most new jobs and areimproving the productivity and profitability of the whole economy. The continued re-orientationof the economy towards the private sector brings considerable gains to real incomes and macroeconomicactivity. It should be noted that all companies which are controlled neither by state norby collective shareholders are considered as private companies; 98% of enterprises in non-publicsector are SMEs (small and medium sized enterprises), and 98% of SMEs are in non-public sector.The changes in government polices explain importantly the emergence of a powerfulprivate sector in the economy. In 2005, regulations that prevented privately-owned companiesentering a number of sectors of the economy, such as infrastructure, public utilities and financialservices were abolished. However, SMEs have always limited access to credits, which hindersheavily their businesses’ expansion and thus their healthy development. Why banks are reluctantto lend to them and how they have fallen into financing difficulties? How to resolve theirfinancing problems and who can serve as their main supporters? This paper tries to respond tothese questions and to draw the best SME financing service system.The paper begins by evaluating the position of SMEs in the real economy as a whole andhighlighting issues facing SME financing. The following section discusses formal finance’ssupport for SMEs, emphasizing the role of credit guarantee institutions. Ultimately, the paperpresents informal finance’s development and outlines its influences on SME financing.2. The private sector—a major driving force in economic expansionChina’s private sector has become its main driver of economic growth. In 2005, there weremore than 40 million SMEs and sole industrial & commercial proprietorships (getihu enterprises),accounting for 99.6% of the total number of enterprises. They were responsible for as much as59% of GDP. They accounted for 60% of sales value and represented 68.65% of imports &exports. They paid 48.2% of taxes, and occupied more than 75% of employment in urban areas.The regions with which SME cooperate have extended from Hong Kong & Macao to somedeveloped countries, such as United States and Italy.4The growth in private output has been the result of the higher productivity of mostcompanies in this sector. The sharper incentives facing the private sector companies have resultedin them using less capital and labour to produce output than state companies. Overall, theaggregate productivity of private companies in the industrial sector is estimated to be almost twicethat of enterprises controlled directly by the state. The profitability of private companies has alsorisen considerably, and the rate of return on physical assets was double that of state controlledcompanies in certain provinces in 2005. Such a high level of competitiveness has resulted in theprivate sector accounting for more than two-thirds of all exports in 2005. While the bulk of theseexports are made by foreign-controlled companies, the domestically-owned private sector isincreasing its exports, as more small and medium-sized enterprises are granted export licences.(OECD, 2005).#p#分页标题#e#The private sector plays a key role in a largely market-oriented economy owing to thechanges in government polices. Government authorities have recognized the importance of theprivate sector for economic growth and job creation, and have moved to reduce a number ofbarriers that limit its expansion and to promote its equal treatment with publicly-owned sectors.On February 2005, the State Council issued “Guidelines on Encouraging and Supporting theDevelopment of the Non Public Sector including Individual and Private Enterprises” that include36 articles for improving the operating environment for private business. The new guidelines givemuch-improved market access to private companies in many industries that were previouslyrestricted, including those that are dominated by state monopolies and heavily regulated sectorssuch as public utilities, financial services, social services and national defence. The directives alsomandate equal treatment of private and public business, calling for rescinding of rules thatdiscriminate against private companies and direct ministries and local governments to carry outimplementation of the new constitutional amendment guaranteeing private property rights. Interms of access to financing, the new guidelines direct financial regulators to expand access tobank, equity and bond financing, through pro-active treatment of private companies under theinterest rate liberalisation, and through impartial treatment of private companies in capital marketaccess. A subsequent survey by the All-China Federation of Industry and Commerce showed thatentrepreneurs cited the new market entry and financing access articles to be the most important.53. The difficulty of SMEs to access to credit3.1 Structure of SME financing and their financing difficultiesAccording to the survey conducted by State Administration for Industry and Commerce(SAIC) in 2002, the domestic private companies, including the very small companies, have lowratios of liabilities to equity, supporting the view that they had limited access to credit. Indeedover 40% of such companies in the sample had no debt, and financed their activities from internalfunds, while the remaining nearly 60% borrowed from banks or informal market (Table 1). Thevery smallest private industrial companies and private service sector companies rely extensivelyon informal credit. Bank credit, on the other hand, seems to be more accessible for largercompanies. The survey also indicates that over 90% of the private companies had difficulty inobtaining bank credit. Over half of the respondents named their lack of collateral as a majorbarrier to bank borrowing. Ownership discrimination was cited by one-fifth of respondentsfollowed by insufficient amount of bank loans and too short-term lending as major problems withbank financing. Much fewer firms chose too high interest rates or stringent requirements for creditrating as top reasons for not bank borrowing. While banks tend to lend short-term, the informalmarkets provide long-term financing. The informal sector also accepts receivables as collateral,#p#分页标题#e#which may help explain why some larger firms rely exclusively on the informal market forexternal finance.China International Capital Corporation Limited’s recent research (2006) indicates thatequity and retained earning represent respectively 30% and 26% of capital resources in SMEs.Among external financing channels, equity market’s entry threshold is high, venture capitalinvestment system isn’t complete, corporate bonds’ issuance entry is difficult, so SMEs can’t raisecapital through capital market effectively. For instance, listing in the stock market in Shenzhen orShanghai is a privilege of a handful of well-established, large and profitable private companies.Although the establishment of the second board on the Shenzhen market for high-tech SMEs mayease this need somewhat for such companies, for non-high-tech companies financing still remainsa major problem. Moreover, bond financing seems to be even less accessible for privatecompanies due to stringent criteria including industrial policy guidelines.6Table 1 – Use of credit by Domestic Private Sector CompaniesSize category (Sales volume, million yuan)0-1 1-3 3-10 10-20 20-50 50+ allAccess to borrowing Per cent of firmsPer cent with no credit 54.2 43.4 39.5 36.1 28.6 42.4 41.1Per cent with credit 45.8 56.6 60.5 63.9 71.4 57.6 58.9Per cent of firm with bank finance only 13.8 23.3 28.3 34.8 43.7 36.1 29.3Per cent with informal finance only 20.2 18.3 15.0 11.6 9.6 7.6 14.0Per cent with bank and informal 11.8 15.0 17.2 17.5 18.0 13.9 15.6Firms with any borrowing1 Per cent of equityManufacturing 51.8 32.3 36.5 39.9 36.5 28.9 32.5Services 43.6 40.9 49.9 30.3 63.8 31.1 39.9All 47.6 36.9 38.8 36.6 43.8 29.5 34.7Share of informal borrowing in totalborrowingPer cent of total borrowingManufacturing 23.3 24.3 19.5 26.4 9.4 3.9 17.6Services 44.2 35.1 8.7 12.1 11.6 8.7 21.4All 35.7 28.2 15.6 20.9 10.3 6.3 10.9Pre tax rate of return on equity 6.1 10.6 11.5 15.1 16.6 15.5 14.8Investment relative to (previousyear) equity plus debt minusinvestment11.8 19.8 24.8 29.9 32.0 30.6 29.0Proportion of firms in each sizegroup14.5 18.7 25.3 12.3 12.6 16.7 100.0Note: Sample size is 2 460 companies.Source: the Chinese University of Hong Kong, OECD Economic Surveys: China (2005)With respect to banks, although lending by State Owned Commercial Banks (SOCB) andother banks to non-state enterprises has been growing rapidly, private enterprises still seem tohave less access to credit than State-owned enterprises (SOE). Small and medium sized businesses,which account for more than half of GDP, receive only 16% of total bank loans. Only 30% ofcredits demanded by SMEs with a good quality have been satisfied. (Economic Daily, 14/06/2006)#p#分页标题#e#Another example. According to Shanghai Branch of CBRC (China Banking RegulatoryCommission), up to the end of June 2005, 71 915 small enterprises had obtained credits, whichaccounted for 28.2% in the total number of small enterprises in Shanghai. There are at least 70%of small enterprises which have never demanded credit, in a conservative estimation. Among1 The enterprises, which have less than 1 million yuans of sales volume, have the highest ratio of borrowing to equity, because theyhave little equity instead of much borrowing.法国essay范文-essay sample-essay writing-SME financing in China Université Paris X-Nanterre-essay sample write essay essay example free essay essay writing essay范文 argument essay english essay globalization essaythose which had demanded credit, only 10% of small enterprises failed due to their poormanagement, 45% were refused because they hadn’t acceptable properties as a pledge for banks.3.2 Why banks are reluctant to grant credit?Credit demanded by SMEs has the following characteristics: small amount, urgent andfrequent demands, in short term. The control cost of such credit is much higher than the one ofcredit to big enterprises. The smaller scale of SME loans makes banks proportionately moreexpensive to monitor. Big banks prefer to do business with big enterprises. Yet there are small &medium banks which have much less capital and which grant credits to SMEs with a good quality.These banks are less competitive but know very well SMEs in their regions.Likewise, poor management, complex related transactions, non transparent accounting andweak anti-risk capability have aggravated their difficulties to get credits from banks. Banks don’twant to lend to them owing to information asymmetry and high costs of transaction and control.Banks’ efforts to avoid incurring new non-performing loans reduce the access of SMEs,state owned and non-state, to bank credit, while larger SOEs (State Owned Enterprises) backed bycentral or local governments are able to get loans largely because of the implicit guarantee thatbacking confers. Non performing loans granted by big four SOCBs (State owned commercialbanks) to SOEs can be written off or transferred to AMCs (Asset Management Corporation). TheState has infinite responsibility. But those granted to SMEs can’t benefit this advantage. Thepersonnel who grant credits are always responsible for them. Generally, SMEs are considered tohave a relatively high default risk. In 2003, average NPL ratio of lending to SMEs in principalcommercial banks was 32.11%, 15.7 points more than the average NPL ratio in commercial banks.#p#分页标题#e#For this reason, the Big-Four which want to lessen NPL ratio in order to satisfy the regulatoryrules defined by CBRC (3%-5%) will be very prudent to SME lending.Due to high risk in SME lending, banks demand SMEs to put enough properties in pledge,or to look for a guarantee as an indispensable condition to grant credit. Nonetheless, most ofSMEs haven’t enough acceptable assets as a pledge. This is a great handicap in their financing. Soa fully developed credit guarantee system is strongly needed.8The present dependence on collateral and guarantee is indicative of the fact that banks nowhave limited capabilities to assess, process, and price loans to smaller customers. Improvement ofthese capabilities is the ultimate key to ensuring adequate access to credit for SMEs and willrequire substantial upgrading of internal systems for assessing and managing risk andconsiderable training of staff. However, it is particularly important that lenders have necessaryflexibility to charge lending rates that adequately compensate for risks and costs of their loans.The SMEs have a relatively higher business failure rate than larger borrowers. Risks of lending toSMEs are further increased by their relatively poor information systems, which makes it difficultfor banks to assess their creditworthiness. Official restrictions on bank’s flexibility in settinglending rates were an increasing impediment to SME lending as banks became more conservativein the effort to avoid further non performing loans.Empirical analyses by MOLNAR and TANAKA (2007) show that private firms havedifficulties in obtaining financing from the formal banking system and their access to bank loansdepends on their credit history, size and rating that can’t easily be manipulated through creativeaccounting. Loan decisions irrelevant of the financial health of the company may suggest thatbanks, especially the largest ones, don’t have appropriate incentives to develop monitoring andrisk pricing skills as they mainly engage in lending to SOEs (i.e. they are not able to distinguishbetween genuine and manipulated performance indicators). Firms in manufacturing sector aremore likely to get loans, probably due to the fact that manufacturing firms are more likely topossess assets that can be used as collateral compared to firms in service industries.4. Enlarging access to credits for dynamic sectors—Formal finance’ssupport for SME4.1 Credit guarantee Schemes (CGSs)As described above, lack of collateral is the chief difficulty in obtaining bank loans forSMEs. Collateral or loan guarantee, or both, have become an essential precondition for most SMElending in China.9Improving financing for SMEs undergoing substantial expansion has become a mainconcern for government. The central government has taken many steps to improve the flow of#p#分页标题#e#credits to SMEs in urban areas. Besides urging banks to penetrate that market, the government haspromoted the establishment of credit guarantee schemes for smaller firms. The largest componentof such schemes is the government-sponsored credit guarantee institutions established bymunicipalities and provinces. In addition, there are a smaller number of member-SME-fundedmutual guarantee funds and private-sector invested commercial guarantee companies, both formsof which pre-date the establishment of government credit guarantee institutions.Nearly all provincial governments have established credit guarantee institutions.Following a pilot programme starting in 1998, 30 provinces established credit guaranteeinstitutions. There were more than 20 in 1997, more than 300 in 2000, 848 in 2002 (one thirdwere private credit guarantee institutions), more than 3 500 in 2004 (more than 2 000 were privatecredit guarantee institutions), and the number of such institutions reached more than 4 000 in 2005,with the amount of loans carrying guarantees amounting to about 400 billion RMB. According tothe statistics, there are 1 200 credit guarantee institutions which serve especially for SMEs (forcredits and shares issue), which account for 32.28% in all of credit guarantee institutions. (ThePeople’s Bank of China & China Finance, 23/01/2006)The credit guarantee institutions are highly diverse: some are funded from the governmentbudgets, others by fees on participating businesses, or by private investors, or a mixture of thesesources. More than 70% of the funds of the institutions originate from non-government sources. Inlots of such institutions, the capital invested by private enterprises and individuals is more than60% (Financial News, 07/09/2005). The organisational form of the institutions varies from publicservice units, to state or privately controlled shareholding enterprises, to fund managementcompanies. Further, they can be non-profit or profit institutions and their business scope can belimited to guaranteeing firm borrowing or can cover a wider range of activities.The remainder of this section is organized as follows. 4.1.1 analyses guarantee businessoperation; 4.1.2 presents the establishment of guarantee system; 4.1.3 discusses risk management10and puts forward some proposals for reform; and finally, 4.1.4 outlines the importance of privatecredit guarantee institutions’ development.4.1.1 Guarantee contractThe enterprises which demand guarantee should satisfy the following conditions:- They should register in State Administration for Industry & Commerce.- They should have been created three years ago at least, and shown good performancein the three previous years.- The ratio of liabilities to assets can’t exceed 70%.- The domain in which enterprises work should be supported by State (for example,#p#分页标题#e#industrial policies, environmental protection policies, etc). If the domains are restrictedby State, credit guarantee institutions won’t accept their demands.Generally, credit guarantee institutions charge a price less than a half of bank’s lendinginterest rate2. The prices vary across different credit guarantee institutions, amounting to 0.8%-3%of guaranteed credits. In addition to this guarantee price, SMEs should also pay a guarantee feewhich is calculated per year and is paid only once3. The guarantee fees vary with credit amountsand the risk level of SME. Guarantee fee rate is defined on the basis of credit risk degree, and it’sa floating rate. Guarantee fee rate is limited to 50% of banks’ lending rate in the same term atmost4.Credit guarantee institutions often demand counter-guarantee as an essential condition forgranting the guarantee. There are various forms of counter-guarantee, such as mortgages on landuse rights and real estate; means of transportation, equipment, and other movables; cashable2 The floor of bank’s lending interest rate is 6.12% for one year. There is no ceiling.3 For the guarantee in short term (3 months, 6 months), the guarantee fee is calculated per month (annual guaranteefee rate/12).4 Target lending rate (adjusted by the People’s Bank of China, effective from August 19, 2006)Credits in short termduration<= 6 months: 5.58%6 months<duration<=1 year: 6.12%Credits in medium and long term1 year<duration<=3 years: 6.30%3 years<duration<=5 years: 6.48%duration>5 years: 6.84%11saving instrument, actions, bills of exchange; pledges on transferable stocks, patents, andtrademarks; the guarantee granted by another person or institution, the enterprise chief’s unlimitedresponsibility, etc.Most of guaranteed credits are in short term (<=one year). The guarantee covers normallythe principal and the interests, eventually with loss undergone by creditors in certain guaranteecontracts. This depends on the negotiation between bank, enterprise and credit guaranteeinstitution. After granting the guarantee, the credit guarantee institutions should control theenterprises continuously.In case the enterprise can’t repay credit to bank on the maturity of contract, the bank willhold caution deposited by credit guarantee institution, which is called “substitutive refunding”. Ifthe enterprise has a cash shortage, and she can refund credit later, we call it “temporary relay”. Incontrast, if the enterprise hasn’t the capability to refund it, we call it “default credit”. Normally,credit guarantee institutions assume all of implied responsibility, i.e. they refund credits to banks,and then they demand enterprises to refund them. Certain banks give a time limit (for example, 3#p#分页标题#e#months after the expiry of credit contract). If the enterprise can’t yet repay credit, the creditguarantee institution will repay it for the enterprise.The substitutive refunding ratio relies on the credit guarantee institutions’ riskmanagement. It can be zero in certain credit guarantee institutions, with contrast that others willgo bankrupt owing to only one substitutive refunding. Most of enterprises are responsible for theirengagements, and so the substitutive refunding ratio is low.After refunding credit to the bank, the credit guarantee institution requires the enterprise torepay it, and all of interests (not only those paid to the bank, but also interests for the period aftersubstitutive refunding), eventually with loss and fees for creditor. The interest rate demanded bycredit guarantee institution for the period after repayment to bank can be the same as the onedemanded by bank, or even higher than the bank’s lending interest rate. In case of no refunding,the credit guarantee institution will sell pledges. The pledges are sufficient for refunding creditgenerally, so the credit guarantee institution has little loss.12The guarantee law (promulgated on June 30, 1995 by permanent committee NationalPeople’s Congress and effective from October 1, 1995) and the new bankruptcy law (voted in the23rd meeting of 10th permanent committee National People’s Congress on August 27, 2006 andeffective from June 1, 2007) protect well-functioning guarantee businesses and priority ofguaranteed credits’ repayment.4.1.2 Guarantee systemNational Development and Reform Commission is organizing to establish a SMEguarantee system. There are “one body, two wings, four levels” in this system: one body is modebody (different resources of capital, market-oriented operation, corporate governance, support forthe best); two wings are commercial guarantee institutions and mutual guarantee institutionswhich are considered as supplementary (agricultural credit guarantee institutions included). Thereare four levels in credit guarantee system which have different functions-national, provincial,prefectoral and county.According to plan, the county and prefectoral credit guarantee institutions give guaranteefor SMEs in their proper regions. The provincial credit guarantee institutions grant re-guaranteefor these credit guarantee institutions at lower levels, and supervise them with the People’s Bankof China. They can also grant guarantee directly to SMEs. The national credit guaranteeinstitutions are being established and will work as guarantors of last resort and grant re-guaranteeto the credit guarantee institutions at lower levels.4.1.3 Risk managementIn most of guarantee businesses, the credit guarantee institutions have joint obligation5, i.e.#p#分页标题#e#banks transfer the whole credit risk to credit guarantee institutions. The only risk for banks is thesubstitutive refunding risk which comes from credit guarantee institutions. Credit guaranteeinstitutions can also have an ordinary obligation6 or assume the risk proportionately with banks5 After the expiry of the contract, the banks can demand enterprises or credit guarantee institutions to repay credits.6 After the expiry of the contract and before trial or arbitration, credit guarantee institutions can refuse to assume guaranteeresponsibility. After adjudication, banks use properties put in pledge to refund credits. The credit guarantee institutions bear losswith banks proportionately. The proportion is negotiated by them.13together7. In a mature credit guarantee system, credit guarantee institutions should assume the riskproportionately with banks. The objective is to avoid moral hazard on any side. Banks or creditguarantee institutions can collude with enterprises to damage another side’s interest.SMEs should put their properties in pledge either in banks or in credit guaranteeinstitutions as an indispensable condition for obtaining credits. The value of properties put inpledge covers the principal and the interests normally.Credit guarantee institutions should deposit a caution in banks as a basis of cooperationwith them, which is also a precaution against risk in banks. If the enterprises can’t repay theircredits at the term of the contract, banks will hold the caution. The caution rate in banks variesfrom 10% to 20% of the guaranteed credit amount, i.e. the credit granted by banks can’t exceed 10times the caution deposited by credit guarantee institutions. For example, credit guaranteeinstitution deposit 10 million yuans in a bank, this bank will lend a sum of 100 million yuans inmaximum guaranteed by this institution8. Certain credit guarantee institutions are demanded ahigher caution rate, at around 20%–33%. Others are demanded nothing.Sometimes, the banks demand also the enterprises to deposit a caution, which differs fromthe one deposited by credit guarantee institutions. These two cautions can coexist.The caution deposited by enterprises in credit guarantee institutions serves as a counterguarantee.Some credit guarantee institutions demand enterprises to pay a caution. Most don’t doso. The caution is 2%–10% of guaranteed credit amount. If the enterprise can’t repay its creditaccording to the contract, credit guarantee institutions will hold part of the caution deposited bythe enterprise. This part of the caution will increase along with time. Six months later, the creditguarantee institution will hold the whole caution. It’s punishment for the enterprise. Enterprisescan’t require to refund the caution. This punishment differs from the substitutive refunding. The#p#分页标题#e#substitutive refunding is done with credit guarantee institutions’ ownership, that is the cautiondeposited in banks by credit guarantee institutions.7 e.g. banks bear 30% of risk.14In general, credit guarantee institutions bear different risks, such as guaranteed enterprises’risk 9 , pledge sale risk, macro-economic risk (law, regulation and policies changes), andoperational risk. So strengthening their risk management capability is a very important conditionfor cooperating with banks, developing their guarantee businesses, and especially for acceleratingSMEs’ development.18.104.22.168 “SME credit guarantee institutions’ risk management temporary measures” (26/03/2001,, Ministry of Finance)These measures take important precautions against risk.