China promises more loans for small companies

AP News
Posted: Oct 12, 2011 9:09 AM
China promises more loans for small companies

China's government on Wednesday promised more bank loans for struggling entrepreneurs who have been squeezed by credit curbs as it tries to stamp out a fast-growing unofficial lending industry.

Credit curbs imposed to cool an overheated economy have led to a surge in bankruptcies and prompted some borrowers to turn to high-interest underground lenders. Analysts say the rapid growth of such lending could cause problems if it is not controlled.

The Cabinet promised state banks, which often are reluctant to deal with entrepreneurs, will lend more to small companies and said institutions will have to tolerate a higher rate of bad loans. It promised to waive taxes related to lending to small businesses.

Beijing told its banks to lend freely to help China's economy rebound from the 2008 global crisis. But it has clamped down on credit to cool growth that hit 9.5 percent in the quarter that ended in June and to tamp down surging inflation.

Lending outside the government-regulated banking system could interfere with efforts to control inflation and rising housing prices. Financial analysts say lenders charge annual interest of up to 70 percent, well above the central bank's 6.56 percent benchmark for a one-year loan.

Wednesday's statement expanded on a pledge by Premier Wen Jiabao, the country's top economic official, to help enterpreneurs and stamp out "illegal fundraising" during a visit last week to Wenzhou, a southern city known for its entrepreneurial vitality.

The credit crunch has forced one-fifth of Wenzhou's 360,000 small and medium-size businesses to stop operating, according to local officials. Some factory owners have fled, leaving behind millions of dollars in debts.

Communist leaders regularly promise additional help to entrepreneurs who create most of China's economic growth and new jobs. But when lending curbs are tightened, private companies are the first to be cut off while state-owned institutions continue to lend to politically favored government companies.

"Small and medium-size companies are indispensable to promoting economic growth and job creation, technology innovation and social stability," the Cabinet said.

Credit Suisse economist Dong Tao has estimated total informal lending at up to 4 trillion yuan ($615 billion). That is equal to about 8 percent of official lending but Tao says it might be growing by up to 50 percent a year.

"This wild wave of nationwide informal lending could cause major problems, if it is not handled carefully and proactively by the government," Tao said in a report.

Such unofficial lending is financed with money from entrepreneurs and even state-owned banks and major companies, according to Chinese media and financial analysts. Borrowers include smaller companies that cannot get bank loans and developers who are trying to evade credit curbs meant to control soaring housing costs.

The Cabinet also promised to develop venture capital and other new channels for companies to raise money.