The Asia Global Payment Summit. Bali, Indonesia. 10-11 October 2019

Financing Costs for Private Enterprise Still Excessively High: Yu Yongding

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One of China’s most influential economists says that problems with the banking sector are impeding its ability to service private enterprises and the real economy.

Speaking at the 17th Caijing Think Tank Salon over the weekend, Yu Yongding said that “banks cannot only act in the service of earning money, they must also service the real economy.”

Yu, who is the former president of the China Society of World Economists, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences and a member of the National Committee of the Chinese People’s Political Consultative Conference, said that financing costs for private enterprise remain obdurately high.

According to Yu the average annual interest rate on loans for private enterprise in China is 16.7%, which is a challenge to bear for most enterprises.

For small-and-medium sized enterprises – most of which are private concerns, the interest rate can be as much as 20% higher than the benchmark rate, while financing expense is further compounded by the cost of collateral.

Financial institutions provide relatively short-term loans to private enterprise that usually do not exceed one year, and generally require that they make deposits prior to lending.

The onerous financing conditions for private enterprise are putting a heavy burden on the Chinese economy, given the increasing contribution they make to growth.

As of June this year there were approximately 24.97 million private enterprises, accounting for over 60% of GDP, domestic investment and foreign direct investment.

Private enterprises in China also contribute over 50% of tax revenues, comprise over 70% of the country’s tech enterprises, provide over 80% of urban employment and account for up to 90% of new employment.

When it comes to the reason for high financing costs in the private sector, Yu Yongding points to problems with banking sector assessment measures.

Banks need to earn profits and assessment work is performed by the higher levels within banks, yet available information is inadequate, leading to a lack of understanding of small-and-medium sized enterprises.

Yu said that the finance sector should adopt pragmatic measures to overcome these problems, as financial institutions cannot exist solely to earn money, but must service the real economy and society.

When it comes to a lack of information on small-and-medium sized enterprises, Yu calls for the establishment of an information system that follows the lead of the SME information platforms used in Japan.

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