Coronavirus: China grants banks extra funding to spur loans to hard hit small businesses

Frank Tang

Beijing is racing against time to help small Chinese businesses hard hit by the novel coronavirus epidemic, as a large proportion of remain shut but still have a long list of bills to pay.

Many small and medium-sized enterprises (SMEs) have reported they have only a few months of cash reserves left to weather the epidemic-induced economic slowdown, and unless business returns to normal soon, or they receive government aid, many are at risk of failing.

This could result in a sharp increase in unemployment, since SMEs account for a majority of jobs in the world’s second largest economy. Rising unemployment would pose a risk to social stability, a threat Beijing is keen to avoid.

Data released by the industry ministry on Tuesday showed that only 30 per cent of small businesses had reopened, well below the operating rates of above 60 per cent for big industrial enterprises, whose support the government had prioritised.

In the latest of a series of moves to bolster small businesses, the State Council, the government cabinet, announced after Tuesday’s executive meeting that it would grant banks another 500 billion yuan (US$71.1 billion) for targeted lending, on top of the 300 billion yuan in additional funds released by the government in early February for epidemic relief.

To help spur borrowing, the official interest rate set by the central bank for commercial lenders extending credit to these rural areas, farms and agriculture firms, as well as other small businesses, was cut by a quarter percentage point to 2.5 per cent. Regional banks that extend such loans at a rate no higher than a half percentage point above the benchmark loan prime rate will be eligible to apply for the new government funding.

The cabinet encouraged private commercial banks to postpone interest payments on loans to small businesses experiencing cash flow difficulties until the end of June, and defer the repayments of principal for the time being.

The State Council also ordered large state-owned banks to increase lending to small businesses by at least 30 per cent in the first half of 2020. China’s three government-run policy banks were also told to lend 350 billion yuan (US$49.7 billion) to small businesses at preferential rates.

The measures reflect the government deepening worries about the near-term outlook for national economic growth and employment.

Analysts expect the impact of the coronavirus outbreak will cut China’s economic growth rate by at least two percentage points in the first quarter compared to the 6 per cent growth rate expected in the fourth quarter. The economic cost could well increase because of the disruption to global supply chains.

Beijing has already announced a series of measures to help struggling small businesses, including exemptions on some rent payments for two months, as well as reducing their tax burden and contributions to the national social security fund.

“Only a small percentage of micro, small and medium-sized businesses have restarted operations. As these firms are major job providers, we must give them greater support to facilitate the early restart of work and tide them over during the tough time,” Premier Li Keqiang was quoted by the official Xinhua News Agency as saying during the cabinet meeting.

Premier Li also announced that single proprietor businesses, which account for 200 million jobs nationwide, will receive the same tax and social security contribution cuts as other businesses.

“It’s vital for the livelihood of tens of millions of families and to the stability of the whole society,” he added.

Ding Shuang, chief Greater China economist of Standard Chartered Bank, said Beijing was trying to keep cash-strapped small businesses afloat by pressuring commercial banks to lend to them, using the threat of sanctions after the quarterly regulatory assessment of their operations and through incentives like increasing the amount of money for them to lend.

Ding said the new funding is “a large amount of money and the arrangements are laid out in detail. Everything is intended to help small firms because they are vital for the country’s efforts to stabilise employment.”

SMEs, most of which are privately run, employ more than 80 per cent of the national workforce, but because they are so dependent on regular customer traffic for their revenues, they have been the hardest hit by the restrictions enacted to contain the virus outbreak. They have also had only limited access to relief funding so far.

“Credit support is an important tool in this round of economic stimulus. It is out of the question [that the government will] increase leverage to counter the crisis. But the market is wondering if the [extra funding] is just a temporary measure or a policy reversal,” Ding said.

Tang Dajie, a researcher with the Beijing-based research group China Enterprise Institute, said lending to SMEs is often riskier and comes at a high cost, and so a new mechanism was needed to tackle the decades-old problem of the access of small businesses to adequate credit.

Data from the China Banking and Insurance Regulatory Commission indicated that about only one fifth of the country’s small businesses had ever taken out a bank loan.

Tang said the increase in online banks and digital finance has helped increase the availability of financing to small businesses. But, policymakers needed to urgently consider the question of why small lending firms, hundreds of which were established in the past decade to meet the financing needs of small companies, had failed to fulfil their expected role.

“Government regulations on the allowable scope of small businesses, on their products, on interest rates and even on executive appointments may be too rigid given priority of maintaining financial stability,” he said.

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