MNI EXCLUSIVE: China May Extend SME Loan Support: Advisors

China may extend supportive lending programs for small companies beyond the first quarter given their shaky recovery, the uncertain economic outlook for the latter part of the year and to avoid hawkish signals amid attempts to normalise policy, advisors told MNI.

The government will want to ensure these companies survive in case the economy faces a setback because consumer spending has not kept pace with the rebound in production, said Dong Ximiao, the chief analyst at Merchants Union Consumer Finance.

The State Council recently allowed small firms an open-ended deferment of loans maturing in the first quarter, an extension from earlier guidelines that limited applicability to debt maturing before the end of 2020 and specified repayment by March end. In a bid to relieve the stress on banks, the PBOC will continue to provide them with funds at preferential rates for 40% of loan value through the first quarter.

Advisors expect Beijing to extend the program yet again to include loans maturing later this year and to continue with the preferential funding facility beyond March end.

Preferential lending programs are flexible and based on circumstances and the government can adapt them at any stage, said Wang Jun, an academic committee member at the China Center for International Economic Exchanges (CCIEE) who expects a slowdown in the second half as the low-base effect fades.

CHALLENGES

While Beijing has pledged to reduce leverage, the Politburo meeting in December, which set the tone for economic policies this year, emphasized support for small and micro-sized firms that dominate the services and export sectors and struggle to get loans from national and regional banks even in good times.

Companies are classified as small based on many factors, including their sector, but in general they have annual revenue of less than CNY200-300 million. Microlenders have been a source of funds for these companies in the past but the crackdown on that sector has added financing to the post pandemic challenges posed by weak domestic demand, a strengthening yuan and rising prices for commodities such as iron ore.

A recent Peking University survey of over 20,000 small firms showed that more than 70% have failed to restore revenues to half the year-ago level. The survey said each firm creates 5.9 jobs on average and thus has a significant influence on employment.

According to Dong, the second quarter will be important from the policy standpoint as the economic outlook will become clearer.

Wang said the authorities will avoid any hawkish signals in the meantime. Holding multiple policy rates, including prime lending rates and money market rates, steady is already marginal tightening, Wang said. He thinks credit may be tightened marginally through window guidance and macro-prudential assessments for financial institutions.

Nicolas Zhu, a bank analyst with Moody's in Beijing, said that micro-lending accounts for no more than 5% of banks' overall assets and thus has limited impact on their performance.