far, 2019 has been a key
year for China's economic transition and upgrade. Amid the trade war with the
US and the nation's continued push to slash overcapacity, inventories, and
deleveraging, all levels of governments have no choice but to face downward
pressure on the economy and employment.
highlights the significance of small and medium-sized enterprises (SMEs) to the
economy as well as the difficulty they have experienced with fundraising.
joint efforts are needed from governments, financial institutions, and
businesses to take advantage of diversified capital to spur economic
innovation and diffuse fundraising woes impeding small business development.
main issue with SME fundraising does not pertain to China. Instead, it's a
globalized financial challenge. Developed economies would also rack their minds
to give their domestic SMEs "blood transfusions" through non-market methods including
technology, industry, and employment subsidies.
is a manifestation of economic law. As borrowers from commercial banks, SMEs
operational risks than government organizations and large companies. They also
have to also rely on high-risk and yet high-return direct financing arrangements
like equity investment to acquire capital.
with European and US capital markets, China's mainland stock market is much
younger, with exchanges in Shanghai and Shenzhen less than 30 years old. More
than 3,000 companies are traded on the mainland market, which is accessible to
large-scale businesses with healthy
profit margins, while the SME fundraising needs that are vastly distributed and
widely different are challenging to meet.
to the size of the Chinese economy, eastern coastal areas, along with central
and western interior regions
differ from each other in economic structure. Domestic liquid capital
markets are unlikely to become the primary
source for SME financing.
way the annual government work reports in recent years have given substantial
attention to underlining development of a multi-layered capital market. The end
result would serve the financing needs of businesses in different regions with
various size and potential.
a multi-layered capital market should at least include the
National Equities Exchange and Quotations in Beijing, also known as the
"new third board," and regional equities markets across different provinces.
advantage China has in developing a multi-layered capital market is
diversification within its economic development. China's consumer market
upgrade is shown being pushed from central cities to rural areas. This
underpins the resilience of the economy, providing room for smaller businesses
to explore opportunities in niche markets.
does the public still reckon the financial sector fails to provide sufficient
support for SMEs? Moreover, SMEs have complained that commercial banks are
almost absent in serving companies in rural areas and without the ability to
raise money from the new third board and regional equities exchanges.
mismatch in financial services reveals how the commercial bank system remains
the driving force behind China's financial ecosystem while similarities in operating
models among commercial banks are
leading them down a blind alley that only separates them further from the
masses, businesses, the market, and prevents funds from circulating into the
development of commercial banks can't focus solely on financing infrastructure
projects championed by local governments, or rely on property credit policy
easing and disguise risks in pursuit of expansion. The banks should "bend with"
the real economy.
boils down to the fact that commercial banks have over the past 20 years have
made easy money. Property-related companies have relied on the use of land as
collateral while governments have been dependent on the monetization of new
a consequence, the "land plus state-owned" economy has turned out to be the
"golden client" for banks who naturally dislike SMEs that carry operational
risks. However, after several rounds of fiscal stimulus and investments aimed
at ensuring growth, the real estate sector, local government financing platforms,
and a portion of state-owned enterprises (SOEs) have piled up a substantial
amount of nonperforming loans.
light of this, commercial banks have to replace existing loans with new loans to maintain
a balance sheet, and many banks have money and assets that only circulate in
the financial system, thus undermining monetary transmission efficiency.
years to come, outside of a few commercial banks poised to exit the market due
to insolvency, most commercial banks are required to mull over new services to
squeeze water from assets and count on new business models to achieve upgrades.
at all levels, for their part, require SMEs filled with vitality to spur local
job markets. Without professional think tanks and financial services, industrial
development will remain challenging.
careless blunders have been made wherein public finances were used for fraudulent
schemes that only harmed society. This means that in the rural part of economy
where there's insufficient financial services, professional financial institutions are required to
spur business vitality via the offerings of structural financial products.
the China-US trade war escalates, many export-driven SMEs face financial
difficulties. Provincial governments are supposed to provide services aimed at innovation and fueling
the marketplace, helping businesses acquire access to a comprehensive set of financial
tools such as leasing, pledging of shares, and direct financing.
vigorous SME growth is supposedly the best path for the economy experiencing
downward pressure, as it urges governments to use public finances and advanced
banking services that address market needs.
Author: Xu Weihong, Global Research Partner of ANBOUND, Chief Advisor for China Securities JT Fund.