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China's local debt woes

(Shanghai Daily)

08:13, October 13, 2011

China's government is promising more bank lending to small companies that have been squeezed by credit curbs as it unveiled a set of measures to expand financing support for cash-starved businesses.

It promised to have state-owned banks lend more to small companies that have turned to high-interest unlicensed lenders after regulators tightened access to credit to cool an overheated economy.

The government said it will crack down on the unregulated informal lending that industry analysts warn is growing rapidly and could cause financial problems if not controlled.

The measures, including allowing small companies to issue more bills and bonds while paying less tax, were announced on the government's website (www.gov.cn) after a State Council meeting presided over by Premier Wen Jiabao.

Small banks will continue to implement "relatively" low reserve requirement ratios compared with big banks, the State Council said, falling short of announcing a cut as expected by some investors.

China's reserve requirement ratio for big banks stands at 21.5 percent, and the ratio for smaller banks, which tend to be more focussed on financing smaller firms, is 19.5 percent or lower.

"Currently, some small and micro-sized firms are facing operating difficulties and the problem is that they are also facing a heavy tax burden and finding it hard to get finance, all of which we need to give high attention to," said the State Council's statement.

The government is also to raise the threshold for levying value-added and business taxes for such firms.

However, despite the moves, analysts believe the government will refrain from easing monetary policy in the near term for fear of reigniting inflation pressures.

Guo Tianyong, an economist at Central University of Finance and Economics in Beijing, told Reuters the move should be seen as a "targeted" easing of credit curbs, rather than an across-the-board policy easing.

Small firms hold the key to a stable job market in China as they account for 75 percent of employment.

"It is far-fetched to read these measures as a signal of Beijing relaxing its macro policies," said Qiao Yongyuan, an analyst at CEBM in Shanghai.

"It is a set of detailed guidelines concerned more about providing support for smaller firms and regulating private financing," he said.

China's annual inflation pulled back to 6.2 percent in August from July's three-year high of 6.5 percent, cementing expectations the government will hold off further policy tightening amid uncertainties over global economic recovery.

Since last October, the central bank has raised interest rates five times and increased banks' reserve requirement ratios nine times.

The State Council also vowed to step up a crackdown on the high-interest underground lending market.

Cash-strapped private firms have struggled to obtain bank loans during a credit clampdown, often forcing them to borrow on the underground markets that pool money from individuals and companies - at annual interest rates of up to 100 percent.

These rates, more than 15 times China's benchmark rates, have pushed firms to the limit.

A string of company bosses in China's entrepreneurial capital, Wenzhou in coastal Zhejiang Province, skipped town after failing to repay such loans.

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