A report from S&P Global forecasts that Beijing’s efforts to drive financial inclusion and expand funding for China’s micro and small-enterprises (MSE’s) will result in over USD$400 billion in new loans.
In March Premier Li Keqiang called for China’s leading state-owned banks to expand lending to MSE’s by over 30% in 2019, as part of efforts to prop up flagging economic growth.
S&P Global research indicates that meeting this target could create up to 2.8 trillion yuan (approx. USD$418 billion) in new loans for Chinese small businesses in 2019.
“In our view, Chinese authorities believe more credit to the small and micro sector is very important to supporting overall growth,” said Harry Hu, S&P Global credit analyst in a research report.
Hu points out that the average interest rate for new MSE loans stood at 7.02% in the fourth quarter of 2018, for an 80 basis point drop compared to the first quarter.
Rates for new MSE loans have continued to fall since the start of 2019, dropping to 6.16% in the first quarter.
S&P estimates that micro, small and medium-sized enterprises account for around 60% of Chinese GDP.
While lending to small private businesses is more risky than channelling funds to state-owned enterprises, Hu does not expect the Chinese banking sector to suffer as a consequence.
“Higher MSE lending will lead to higher credit costs and weaker asset quality,” said Hu. “However, the impact on overall bank credit quality is limited.
“Financial-inclusion MSE loans still make up a relatively small contribution to the banking sector’s total loan portfolio, and the government is providing a number of supports to offset the burden.”