Download Financing Innovations of SMEs in China

Financing Innovations of SMEs in China
XIE Ziyuan, WU Yuejin
School of business, Zhejiang Wanli University, P.R.China, 315100
[email protected]
Abstract: SMEs are the main force of China economy. SMEs in China have been faced with financing
difficulty, which becomes very prominent in current financial crisis and has seriously affected the
development of SMEs. There are many reasons leading to SME financing difficulty, which may come
from several sources including SMEs themselves, banks and financial system. This paper analyzes these
reasons thoroughly and puts forth corresponding suggestions on financing innovations for SMEs in
China.
Keywords: SMEs; financing; innovation; information asymmetry
1 Introduction
Financing difficulty SMEs facing is a worldwide problem and is more prominent in China than in
developed countries. There are so many SMEs in China that they remarkably affect the development of
China economy and are of vital importance to solve China employment problem, and it has been paid
close attention to overcome SME financing difficulties in China. There have been many studies on this
problem, such as LIN Yifu(2001), QUAN Liping(2002), TAN Zhijuan(2009), TAO Li(2009), etc. But
they either didn’t give an thorough analyze on the reasons of SME financing difficulty, or analyzed it
unilaterally, so the policies they suggested are either unilateral or impractical. As a matter of fact, there
have been many a lot SME financing innovations in practice, and at the same time, SMEs in China still
have much difficulty in financing. Therefore, it is worthwhile to further the studies on SME financing
innovations. By analyzing the current financing situations of SMEs in China and the difficulties they are
faced, this paper gives some practical suggestions on SME financing innovations.
2 The Current Financing Situations of SMEs in China
SMEs are mostly private enterprises in China. Currently, SMEs account for 99 percent of enterprises in
China, 58 percent of GDP, 68 percent of foreign exchange, 48 percent of taxation, 75 percent of job
opportunities(HUANG Linlin, 2009). SMEs are mostly labor intensive and have stronger profiting
ability than large enterprises in competitive market economy, and hence can create more social
wealth(LIN Yifu, 2001). Consequently, SMEs constitute the main force of China economy and their
development situation becomes a barometer of economy development in China, and to create a feasible
circumstance for SMEs’ development is deserving of great attention.
Among a good many factors restricting the development of SMEs, financing difficulty is one of the most
prominent. According to a special survey by the Chartered Bank & China Academy of Social
Sciences(CASS) in 2007, 90% of SMEs admitted that they had been facing financing difficulty(TAN
Zhijuan, 2009). Since the breaking out of financial crisis, numerous export-oriented SMEs in China
have been worsening in financial situation and facing austere surviving difficulty, loan costs distinctly
rising and loan difficulty increasing. Taking Zhejiang Province as an example, the loan rate of SMEs has
generally floated upward by 30 to 40 percent, the highest up to 80 percent. From January to June in
2009, the financial costs of SMEs in Zhejiang Province increased by 38.33 percent, of which interest
expense increased by 43.27 percent(TAO Li, 2009). Austere financing circumstance has directly respect
to the survival of SMEs. Over 67 thousand of SMEs above designated size failed in the first half of 2008
nationwide, among which Zhejiang Province accounted for 12 thousand (HE Siyuan, 2009).
The survival difficulty due to capital shortage that large quantity of SMEs are faced with has directly
affected China economy development and has gained highly attention of decision layer. Since August in
2008, China government has unveiled several fresh policies in succession to cope with macroeconomics
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and SME development problem, from increasing commercial bank credit line, to ordering commercial
banks by supervision sections to single out the credit line of small business and appraise it singly, to six
supporting policies from state revenue, to decreasing loan benchmark interest rate and reserve
requirement ratios of commercial banks, etc.
The above policies may function to some extent, but SME financing difficulty has profound economic
and social reasons, and only by finding the real reasons and taking corresponding financial innovations
can this problem be solved completely.
3 Why it is Difficult for SMEs to Finance
The reasons why private SMEs in China have difficulty in financing can be analyzed from three aspects:
SMEs themselves, banks and financial system.
3.1Reasons from SMEs themselves
As for SMEs themselves, there are three reasons that lead to their financing difficulty. First, they are
small in scale and have few articles for mortgage. In a circumstance that mortgage credit is required
universally by banks, it is difficult for SMEs to finance. Second, compared to large enterprises, SMEs
have a more acutely finance fluctuation and weaker risk resistance, hence their probability of incapable
of repayment is relatively larger. Another reason is that the financial situation of SMEs is not so
transparent. The financial data of most SMEs are not publicly audited. The finance management of some
SMEs is in a confusion and their financial data are incomplete, which makes it difficult for banks to
judge their operating status. Last, some SMEs have bad credit status,gaining loans by cheating or
evading debts maliciously (XU Hongshui, 2001). Compared with large enterprises, SMEs are relatively
less supervised by the public and public opinion, which means that the default risk for SMEs is
relatively low, and this gives some SMEs opportunities to gain credits by cheating or evade debts. This
kind of behavior undoubtedly worsens the whole financing circumstance of SMEs.
3.2Reasons from banks
In China, banks are the main external financing source for SMEs. Banks in China are mainly
state-owned and SMEs are mostly non-state-owned. The attribute of state proprietorship of State-owned
enterprises weakens their information asymmetry risk in financing, whereas non-state-owned equity of
non-state-owned enterprises aggravates their information asymmetry risk, and hence state-owned
enterprises especially those in a large scale universally have a high credit availability but SMEs with a
non-state-owned equity have a very low credit availability(QUAN Liping, 2002). The characteristics of
SMEs’ loans are of small amount, high frequency, urgent in time, and short period, which makes it
difficult for banks to realize scale economy when providing loans to SMEs. Some expenses, such as
those caused by negotiation, finance examination, administrative archives, management and supervision,
rarely change with loans amount. Hence, the above expenses assumed by 10 thousand Yuan loans are
much higher for SMEs compared to large enterprises. At the same time, it costs lending officers much
time and energy to provide loans to SMEs, which restrains the activity of lending officers to provide
loans to SMEs.
3.3Reasons from the financial system
The financial system in China made up of mainly four state-owned banks, aided by stock market, can
not serve SMEs well(QUAN Liping, 2002). The financial system objectively provides little financing
sources expect bank loans for SMEs. Growth enterprise board has not been released and corporate bonds
market is very undeveloped. SMEs have to turn to bank loans when their inner financing is insufficient.
But due to kinds of reasons, the activity of banks to provide loans to SMEs is very low, and the
financing demands of SMEs are satisfied in a low rate.
Due to the above reasons, the problem of SME financing difficulty is very prominent in China, and only
by fundamental financing innovations according to the reasons may this problem be solved completely.
4 Financing Innovations of SMEs in China
According to the reasons that leads to SME financing difficulty, corresponding financing innovations are
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as shown in table 1.
Table1 Financing innovations of SMEs
Reasons of SME financing difficulty
Financing innovations
Collateral deficiency
Order loans Financial lease
Development of small and medium private financial
Information asymmetry Ownership asymmetry
institutions
Moral hazards
Aggregating loans Construction of SME credit system
Narrow financing channels
Release of second board Short-term financing bonds
4.1Financing innovations based on collateral deficiency
Loans by order and financial lease are feasible financing innovations. Some SMEs have large amount of
contract orders but have no enough funds to purchase facilities, raw material, or employ workers. Banks
may provide loans to these SMEs according to their order amount and prospective cash flows. Currently,
some banks, such as China Merchants Bank, Hangzhou Bank, and Baoshang Bank, have carried on this
business. Some expensive manufacturing equipment(or other fixed assets) are necessary, but it is hard
for SMEs to pay up once all by themselves. Then the bank can carry on financial lease, paying the
equipment off in its own name using its own money. The SME has right to use the equipment by
installment. When the installment expires, the equipment is transferred to the SME for free or in a low
price.
4.2Financing innovations based on information asymmetry and ownership asymmetry between
banks and SMEs
Development of small and medium private financial institutions may solve this problem. On the one
hand, small and medium private institutions and SMEs are both private and there is no ownership
discrimination. On the other hand, small and medium private financial institutions can effectively
overcome information asymmetry. The case of Taizhou Commercial Bank(TCB) illustrates it eloquently.
As the first real private bank in China, TCB is known as the partner of SMEs and its customers are
mostly SMEs. TCB has effectively dealt with information asymmetry that always exists between banks
and SMEs. But why and how? As a small private bank, TCB has four advantages in dealing with this
problem. Firstly, opportunity cost advantage. Compared to large banks, TCB is a small bank and has
lower opportunity costs in serving SMEs because it has no financial strength to serve large enterprises.
When serving SMEs, large banks may have to consider if it is more worthwhile to serving large
enterprises instead, whereas TCB doesn’t have this worry. Secondly, information advantage. TCB is a
small bank and small banks have nature information advantage when serving SMEs (Banerjee, 1994).
Again, culture advantage. TCB and its customers are at the same district, and speak the same dialect,
and have the same core values, which means that the communication costs between them are relatively
low. Last, mechanism advantage. TCB gives full play to the mechanism of private enterprise and has
adopted series of loan policies fit for SMEs, such as floating rate according to deposits, customer
manager system, etc, and these policies have been proved very effective. The case of TCB proves that to
develop small and medium private financial institutions is an effective way to overcome SME financing
difficulties.
4.3Financing innovations based on moral hazards of SMEs
There are two innovative ways. One way is collective loans, which means that many SMEs in the same
industry, or in the same domain, or at the same district, with a leading enterprise taking the lead and a
guarantee center as an intermediary, apply for loans as a syndication other than as individual. In the
negotiation with the bank, all the SMEs act as an integration, and the bank credit lines and loans should
be managed uniformly①. In the form of collective loans, the interests of many SMEs are bonded together
and all the SMEs will have activity to supervise each other, and so evasion of debts may be reduced. The
other way is to construct nationwide SME credit system. Why moral hazards easily happen in SMEs?
Because their default costs are too low and there is no effective accountability system for the chief
，
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①LI Jing. Aggregating loans may solve the puzzle of SME financing. Capital construction weekly 2009-6-15 sixth
edition(in Chinese)
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leading cadres. Accordingly, it is necessary to construct a nationwide enterprise credit system as soon as
possible, and the credit status of the enterprise and its chief leading cadres must be easily identified in
the form of credibility records by a lifelong valid identification(such as resident identification card). In
this way, stakeholders may easily find out the enterprise’s credit information. Even if the chief leading
cadres shift to another place to initiate another enterprise, their credit status is easily found out and it is
hard for them to get more loans by deceiving. Thus, an enterprise’s noncompliance at a time may have a
lifelong bad effect on the enterprise and its chief leading cadres and the default costs are greatly raised,
which is surely helpful to reduce the probability of moral hazards.
4.4Financing innovations based on narrow financing channels of SMEs
This problem may be solved by releasing growth enterprise board and short-term financing bonds.
Release of growth enterprise board may satisfy the financing demands of part science and
technology-oriented and stably growing SMEs. Currently, release of growth enterprise board has come
to a substantive stage in China. In August, 2008, inter-bank market barter association in China began to
research on the modes of SME short-term financing bonds. If this kind of bonds can be released
smoothly, it can undoubtedly widens the financing channels of SMEs.
5 Conclusion
SMEs in China have been faced with financing difficulties. To give China economy a good prospect, it
is necessary to solve this problem in an innovative way. Based on a thorough analyze on the reasons that
lead to SME financing difficulties, this paper puts forward some financing innovations for SMEs. It
should be emphasized that SME financing difficulty is a systematic problem and should be solved in a
systematic way. It is inappropriate to rely too heavily on any unitary innovation.
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