Short-term Bills to Ease Credit Crunch for SMEs

Short-Term Financial Bonds for SMEs
From News Page 5 Issuing September First 2008
Original Article: [Chinese]

Prayers may be answered for a select few Chinese companies starving for loans: China's central bank has been discussing a pilot project to allow small and medium enterprises (SME) to raise funds through short-term financing bills, the EO has learned.

The pilot project would involve 22 commercial banks, each nominating two SMEs for bill issuance. A total of some 3.5 billion yuan would be raised for the selected 44 enterprises, sources told the EO.

This latest development was in response to the plight of SMEs -- who faced credit strains arising from multiple factors, including tight macro controls, rising costs, a drop in exports, uncertainties in the global markets and yuan appreciation.

Short-Term Financing Bill Pilot
A source close to policymakers of People's Bank of China said the central bank had convened a meeting on August 14 with chiefs of major banks to discuss the pilot project. The EO learned that similar meetings had been held frequently throughout August.

Participants would include five major state-owned banks; in addition, two credit rating companies - Dagong global, and Shanghai Brilliance Credit Rating and Investors Service Company - would perform assessment against nominated SMEs.

"The central bank has clearly demanded participating institutions to place priority on the matter," said the above source. Another source added that a two-month deadline had been given to launch the pilot to ensure SMEs received the necessary funding in time.

The central bank had in 2005 held a similar pilot, but the beneficiaries were mainly corporation with assets valued above 2 billion yuan. The latest project, however, would focus on SMEs with assets valued below 400 million yuan.

Considering that China has some 4.3 million SMEs - according to 2007 official statistics - the decision to shortlist 44 enterprises for the pilot could hardly meet the credit demands of the sector.

In response, the above source said the pilot's main purpose was to explore means of developing an effective model of SME short-term financing bills, and if it proved successful, a second phase pilot would follow. The source added: "The first bills may be issued as early as in September."

"We have a strict standard for nominating and qualifying SMEs for the pilot, we are looking at the ones with potential to develop," said a source from a participating bank. The source added majority of the enterprises nominated were from coastal provinces like Zhejiang and Fujian, where private capital and businesses thrived.

The predicament of SME financing had lately drawn close attention from the central bank, which had in early August raised the credit qouta for SMEs and rural businesses by an additional 5% and 10% respectively for national and local level banks.

Potential Market Reaction
A source involved in the pilot project told the EO that only SMEs with assets valued below 400 million would be enlisted, and the issuance of bills would be capped at 40% of their net assets.

"If based on the calculation of a 50% debt ratio, an average net assets of 200 million yuan, and take into consideration the ceiling for bills issuance, each enterprise under the pilot could at maximum raise 80 million yuan. Thus, the total funds for 44 SMEs would be around 3.5 billion yuan," said the insider.

A financial institution researcher who had been doing field investigations in Zhejiang said SMEs were amongst the worst hit under the government's stringent macro control policies.

"Under tight credit controls, banks tend to safeguard the interest of big clients and sacrifice the needs of SMEs. At present, some SMEs have been forced to take loans from private networks or unofficial channels," they said.

As SME credit ratings were usually lower, the central bank encouraged SMEs to look for guarantor enterprises too boost market confidence, the EO learned.

One analyst from a Shanghai-based securities firm said means of risk controls, how to distribute earning yields, and the standard used in assessing credit rating of SMEs could all be disputable and must be clarified.

Another security trader said SME short-term financing bills usually involved higher risks, and that he would not be interested to invest in it.

One credit rating company personnel said investors should look beyond the current size and profit margin of SMEs, instead, to realize the advantages of SMEs, such as having more flexibility and rooms for rapid development compared to mature large scale corporations heading to bottlenecks.