At a high-profile seminar held in Beijing late last month, Liu Mingkang, the newly appointed chairman of the China Banking Regulatory Commission, devoted his first public speech to supporting the growth of smaller firms. This prompted speculation among some analysts that the powerful commission has put top priority on clearing the way for this increasingly important sector of the Chinese economy.

China's nearly 30 million smaller firms now produce more than 50 per cent of its gross domestic product, contribute 40 per cent of tax revenue and provide over 60 per cent of jobs.

He Dexu, a researcher with the Chinese Academy of Social Sciences, said: "Enhancing funding support to small and medium-sized enterprises by financial institutions is one of the banking commission's responsibilities. His speaking about the problem in his first public appearance since he (Liu) took office apparently reflected his resolution on that issue."

The new commission officially started functioning on April 29. In a statement issued then, it did not specifically mention the issue of SME financing, but its broad repertoire in governing banking activities - from circumscribing their business scope to scrutinizing senior officials - obviously gives it plenty of power to tackle the issue head on.

Chinese SMEs are mostly private businesses that have long been frustrated by discriminatory policies by a government that favored State-owned enterprises and they have complained about funding difficulties. Commercial banks, concerned about bad-loan risks and high lending costs, have been criticized by some as holding back on loans.

The government has taken measures to quench smaller companies' thirst for funding. For example, it has set up a special fund to provide guarantees for loans that SMEs take out with banks. Since last year, the central People's Bank of China has been urging commercial banks to lend more. Partly as a result, the money supply jumped by 19 per cent in the first quarter, with most of the increases coming from loans.

But the situation is not improving as expected. "The money supply did rise rapidly, but old problems remain unsolved," said Wang Zhao, a researcher with the Institute of International Finance under the Bank of China, referring to the problems of smaller firms and rural financing.

Many of the new loans went to sectors dominated by big firms - such as motor manufacturing, real estate, steel and telecommunications - where sales are climbing and the expected rate of return is improving. Most small and medium-sized companies returned empty-handed from the bank, said analysts.

Bankers said another key reason why SME financing difficulties are so stubbornly resistant to policy stimuli is the lack of credit records that keep track of smaller firms' borrowing behaviour to assist commercial banks with their lending decisions.

Many of China's relatively young private SMEs badly need to improve their corporate governance and the transparency of their financial data. Some are caught frequently defaulting on their liabilities.

(China Daily May 26, 2003)