SME’s Account for over 60% of China’s GDP, Beijing Mulls Inclusion of Loans as MLF Collateral

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The Chinese central government is pushing for the financial sector to provide greater support to small and micro-enterprises, who have seen their contribution to China’s national GDP surge in recent years.

On 20 June a meeting of China’s State Council proposed the further use of targeted reductions to the required reserve ratio to expand financial support to small and micro-enterprises.

Chief amongst the measures outlined would be the inclusion of loans to small and micro-enterprises of under 5 million yuan as acceptable collateral for the Chinese central bank’s medium-term lending facilities (MLF), one of its primary open market operations tools.

Official data points to roaring growth in the number and economic significance of China’s small and micro-enterprises in recent years.

According to figures cited by Securities Daily of the end of 2017 there were approximately 28 million small and micro-enterprise legal persons in China, as well as approximately 62 million individual industrial and commercial entities.

Small, medium and micro-enterprises account for over 90% of all market entities in China, over 80% of nationwide employment, more than 70% of patents, over 60% of GDP and more than 50% of tax revenues.

The availability and expense of financing continues to be a major challenge of many of China’s small businesses, however.

According to Liu XIangdong (刘向东), a researcher with China Center for International Economic Exchanges, small and micro-enterprises continue to face considerable cost pressures, especially with regard to high financing costs, oftentimes due to a lack of acceptable collateral for loans.

For this reason credit towards small and micro-enterprises should be increased, prompting the central government to unveil policies such as targeted reserve reductions and tax cuts.

The average interest rate for loans to small and micro-enterprises has remained around 6% in recent years, while the rate for internet loans has been around 15%, and rates for credit from micro-loan companies in between 15% and 20%.

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