SME finance in China  key trends in SME finance in China  Major obstacles to improve SME finance  Policy recommendations  Current development

Key trends in SME finance in China  Contribution by SMEs number 99% number 99% output 50% output 50% export 60% export 60% tax 30% tax 30% jobs 70% jobs 70%

Key trends in SME finance in China  Limited or little access to capital market  Share of credit in main banking financial institutions: 16%  High NPL ratio compared to corporate lending  High reliance on internal and informal finance channel

Key trends in SME finance in China  SMEs funding problems  66% of sample SMEs have difficulty to access to finance  The lack of funding is the main blockade to the developments of SMEs (IFC-CPDF survey)  Similar findings from various surveys as presented by Dr. Xu and Shen

Major obstacles to improve SME finance Macro obstacles:  Capital market lacks function of financing especially for SMEs  Insufficient competition in banking sector  Interest rate cap until recently  Address SMEs finance as a social objective, not a commercial business: Can SMEs afford high IR?  unfriendly social, legal, and credit environment

Major obstacles to improve SME finance Micro obstacles:  Banking Inst. lack of core credit tech.  Credit culture and credit mgt. policy not adaptable to SME lending  Information asymmetry  Poor corporate governance

Policy recommendations  Develop capital market  Increase the level of competition of the banking sector, push for down-market, more banking establishment  Promote commercial viability of SME lending: new way of thinking  Remove IR cap  Improve social, legal and financial infrastructure

Policy recommendations  Improve corporate governance  cultivate right credit culture and advocate institutional reform in credit area: talents and risk-based pricing  Capacity building in banking sector for SME lending  SMEs more open to lenders

Current development  Credit guarantee schemes  public and private owned: 4,000  guarantee capability  funding resource  Banks suspicion on CGSs  Overall efficacy limited  Controversy over the effect of CGSs

Current development  Lending rate cap removed by central bank in Sept  Pilot-trial project of lend-only MFIs in several provinces  Guideline on MSE Lending of Commercial Banking Inst. In July, 2005: a major revolution in introducing commercially sustainable MSE lending and promoting institutional and product innovation

Current development  Credit bureau  Improve legal infrastructure: Law on property, Law on bankruptcy, etc.  Gov. at local levels come to help improving the social and credit environment