ArticleBiz Time: The next 60 years (2)
Challenge 2: Financing SMEs
Small and medium sized enterprises feed 75% of China's non-agricultural population. The most urgent need for SMEs is funding growth. As China prepares to enter a new chapter in its development, how aggresive should the it be in its financial reform to better serve the need of SMEs?
Many of the mature financial systems previously admired by developing nations, are now being questioned or even discredited. Given the risks shown by the developed financial models, and the shakeouts underway among the world's mature financial markets, how best should China proceed?
Chang Chun, Professor of Finance, CEIBS
Over the next 60 years, China's real economy definitely will be the world's largest economy. This is for sure. Not within 60 years, maybe even 20 or 30 years. So to be consistent with the real economy, the financial system has to grow tremendously because the financial system now left behind the real system, the real economy.
Chang Chun is a Professor of Finance at C-E-I-B-S. He says for the financial system to catch up to the real economy, the first priority is to finance small and medium-sized companies, as they make up 58% of China's total GDP.
Chang Chun, Professor of Finance, CEIBS
There are two ways of financing enterprise. One is equity and the other is debt.
Let's talk about the loan. I think it's probably more severe, actually. The reason there is a problem in China is that most of the money or deposits are concentrated in the big state-owned banks, big 4 banks. They get most of the deposit, but because of their size, they are not good at making loans to SME. So there is a mismatch here. And to be successful, in providing loans to small companies, you need to channel some of these funds into usually small and medium financial institutions - banks, financial companies and so forth.
There are some examples overseas. In the more advanced systems, like that in the US, small financial institutions actually provide more financing to small enterprises. In China, such small or medium sized banks are starting to pop up. But, their problem is a lack of funds to lend out.
Chang Chun, Professor of Finance, CEIBS
They're already lending at the limit. Because in China there is a requirement that you can only lend 70% of your deposit. If you receive 100 yuan deposit, you can only lend 70yuan. All these smaller or even medium banks are reaching their limits whereas the big banks are under their limits. So the big banks have superfluous money whereas these don't have enough.
For small and medium sized banks to finance enough deposits for loan business, relaxing the constraints on the interest rate mechanism is one option.
Chang Chun, Professor of Finance, CEIBS
And if I can provide a higher interest rate, there will be more people willing to put money in my bank. That is obviously one possibility. But that in the current situation, it carries a lot of risks. This may not be the best way, we do need to think about this. Other ways is to channel the money from big bank to small bank. You give the smaller banks more freedom in the inter bank market to borrow from the big bank. I think there are many inter bank regulations and there are many worries about this. But I think maybe it is a better way than the first way of raising the deposit rate. I think this has more let the big banks to monitor the smaller medium-sized banks by giving the loans and they have the superfluous loan, but they can monitor. And also you need to control the small banks by having more regulations on capital requirement. And using these ways to control the risks.
If the small banks are allowed to offer more competitive rates in the inter-bank market, the big banks with surplus deposits will have the incentive to lend out money. And as smaller banks keep in close contact with smaller enterprises, the credit risk will be much more easily monitored.
Dr. Xiaonian Xu, CEIBS
My call is to open up the industry, cut the red tape. You don't need to get approval from regulators to open up a small rural bank. You don't! Remember the TV Series [qiao jia da yuan] thousands of years ago, our ancestors did that business. Why not today? We are smarter than our ancestors aren't we?
Deregulating the banking business will create an injection of cash into China's SMEs, which will deliver a shot of health and vigor into the overall economy. However deregulation doesn't mean that the government will take its hands off the business.
Dr. Xiaonian Xu, CEIBS
I don't think anytime soon we can see small financial institutions emerged in our domestic market to support service industry or support SMEs which are key for full employment in China.
Cities like Beijing, Shanghai, and Tianjing have already set up small loan and guarantee companies to serve SMEs, and each loan transaction can be as much as 2.5 million. At the end of September, China announced it would cut taxes for small enterprises whose taxable income doesn't exceed 30,000 yuan. From January 1st to December 31,2010, these companies' taxable income will be slashed in half, and taxed at a 20% rate. In other developed nations worldwide, SMEs' funding channels are also supported by private equity. But the professors explained that while this is lacking in China, public equity - getting listed - is another option.
Chang Chun, Professor of Finance, CEIBS
The other way is to let the small and medium enterprises have access to equity. This has been happening, but it mainly comes from the foreign perspective.-- private equity means VC and PE, venture capital and private equity. It used to mainly come from abroad, so the foreign equity came in and invest in those Chinese small startup companies. But that is obviously right now because of the financial crises, that's come down, and we also need to channel the Chinese money, the RMB, into this. So obviously in the past two years there have been a lot of development, but still, many different places have many different rules, and different regulations, there are a lot of these things. So these things haven't really been well established. Although there is development.
Besides private equity, public equity is another channel. And China is actually making steps towards it. A stock exchange board for small companies, the Growth Enterprise Market, is in its final phase of preparation. And it is expected to be launched some time in October.
Chang Chun, Professor of Finance, CEIBS
The listing requirement will have to be lower, so these small companies can have listing, public listing as well.
The Second board might need time to become an effective financial channel for SMEs, and VC or PE in China as it is not yet as active as in the States. But without these, China's economy will not be able to jump to the next level.