China: Challenges remain for SME financing – Standard Chartered

Analysts at Standard Chartered suggest that China’s macro policy this year has prioritized the improvement of financial services for SMEs and private enterprises.

• “China’s policymakers set targets for the big five banks to increase outstanding loans to SMEs by 30% and lower SMEs’ comprehensive cost of financing by 1% in 2019 versus last year. Based on official statistics, we expect banks to meet the annual target and to add CNY 2.8tn of SME lending in 2019. We estimate that big banks have completed c.80% of their annual target, though medium and small-sized banks have much to catch up in H2-2019.
• Our China SMEI, based on a monthly survey of over 500 SMEs nationwide, showed a less sanguine picture. Bank credit access increased significantly in Q1 but has weakened since then, with SMEs’ borrowing costs showing only a transitory improvement.
• The allocation of credit resources to SMEs was disproportionately concentrated in the IT sector and Eastern China, leaving the rest of the sectors and regions short of financing. Our latest SMEI reading reflects rising pressure on SMEs, especially manufacturers and exporters, raising calls for further efforts to address their financing difficulties.
• The central bank is likely to further enhance credit support to SMEs through the flexible use of structural monetary policy instruments, including targeted RRR cuts, MLF, re-lending and re-discounting, MLF rate cuts and Central Bank Bills Swap (CBS), to tackle liquidity, capital and pricing constraints faced by medium and small-sized banks. Banks will need to decrease their funding and operating costs and determine risk premium more accurately, to lower real lending rates for SMEs while maintaining reasonable business returns.”