One of the more remarkable aspects of Chinese government efforts to fend off the global economic downturn has been a surge in lending. To keep struggling enterprises afloat, Beijing urged Chinese banks to open the credit floodgates and bankers have done so. The People's Bank of China, the central bank, estimates that $224 billion in new loans were made in June alone, bringing the total for the first half of the year to $1.08 trillion 50% more than the amount of loans Chinese banks issued in all of 2008.
But this credit flood has been directed mainly at large, state-owned companies. It has not been trickling down to the country's private small- and medium-size enterprises (SMEs), which continue to have difficulties securing loans, even though the global credit crisis has abated. The People's Daily newspaper reported in late June that SMEs have received less than 5% of the total volume of loans. That's not just a problem for private business owners. Because their firms do a better job of creating employment than state-owned enterprises, the credit crunch creates headaches for policymakers trying to limit unemployment during the economic downturn.
This imbalance has forced small-business owners to avail themselves of unusual lending schemes. In many regions, companies are forced to go around the traditional banking system altogether by borrowing from other businesspeople or even loan sharks. This sort of informal banking, which has a long history in China, has become more popular as the economy slows, says Du Xiaoshan, deputy director of Rural Development Institute at the Chinese Academy of Social Sciences. "It's hard for small and rural businesses to get bank loans, so there's generally more informal lending happening," says Du.
Among the more innovative schemes is a program started by the business-to-business website Alibaba.com, which connects Chinese manufacturers with overseas customers. Last year the company's founder, Jack Ma, began to worry about the souring economy and its impact on Alibaba's 32 million members. "He told his lieutenants to all go out and figure out how to help our customers because there's a bad time coming," says John W. Spelich, Alibaba's vice president for international corporate affairs.
The result is a program that acts as a kind of matchmaking service between members and banks. The service began last year in Zhejiang, a coastal, trade-focused province south of Shanghai, where 600 businesses used Alibaba to acquire loans worth more than $146 million through China Construction Bank and the Industrial and Commercial Bank of China. This year the program has expanded to Guangdong, Shandong and Jiangsu provinces and several coastal cities including Shanghai and Shenzhen. Seven other banks, including Bank of China, China Merchants Bank and Shanghai-Pudong Development Bank, have signed on. Alibaba expects to facilitate more than $878 million in loans. Some 9,000 companies have applied.
The chief reason that small, private enterprises have such difficulty is that China does not have a well-established system of credit ratings. "Banks are geared to lending to very big companies that are very easy to understand," says Spelich. "Lending to a company that has maybe five employees is not an intuitive thing." Banks consider small businesses poor loan candidates because they have shorter life cycles, often keep spotty financial records and lack significant property or other forms of collateral, says Du, the Chinese Academy of Social Sciences deputy director. Lending to a state-owned enterprise comes with at least the tacit understanding that the government will guarantee the loan, or at least ensure the company doesn't suddenly fold.
Because of the detailed information Alibaba has about its member companies, such as the type of Web traffic they generate, it can provide banks with additional data to determine a company's creditworthiness. "We are definitely not trying to take the place of the major banks," says Spelich. "What we are trying to do is help them understand a class of entrepreneur they typically don't do business with."
For Wang Baoguo, CEO of the Hangzhou Dafeng Furniture Co., securing two loans via Alibaba has meant gaining the cash to buy raw materials at lower cost. The seven-year-old company employs 150 people and manufactures wooden home furnishings. But despite its experience, Hangzhou Dafeng has traditionally avoided pursuing credit through traditional channels. "A small start-up company like ours doesn't remotely qualify for loans under the banks' criteria, so I didn't even bother to try," says Wang. Through the Alibaba program, the company was approved for a $100,000 loan. After repaying that, it applied for and was quickly approved for a second loan of $220,000. Wang doubts that would have been possible under traditional lending methods. "Most of the banks set their standards so high that few small businesses are able to meet them," he says.
Some smaller commercial banks have started experimenting with lending to small businesses, says Du. Other initiatives include websites that provide a sort of online credit market, where parties looking to make or take out loans can post terms and find deals online. But so far the volume is low and the terms are prohibitive. "There are many more approaches we have yet to explore, and we shouldn't be limited to one single model," Du says.
While new types of lending programs are slowly expanding credit to SMEs, things could get worse later this year. The overall boom in bank lending has increased the risk of bad loans that could come back to haunt the financial system and delay economic recovery. Some economists now say that policymakers will want to control credit more tightly in the second half of the year. Their challenge will be to ensure that small businesses that have seen little help thus far don't get further squeezed as the credit explosion is reined in.
With reporting by Jessie Jiang