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Real Boon for SMEs

Financing difficulties of small- and medium-sized enterprises (SMEs) have seemingly caught the attention of policymakers.

It was first reported that small- and medium-sized banks were expected to be set up to increase loans to small enterprises.

Then the news has been that the People's Bank of China had agreed to raise the credit quota by 10 percent for local commercial banks, compared to a 5-percent increase for national lenders. Such differential credit adjustment is a manifestation of the central bank's intention to ease the impact the current credit crunch exerted upon SMEs.

If the credit quota is imminently relaxed as reported, it will mark a big step in indicating a change in China's policy focus from fighting inflation to maintaining growth. A recent hike of tax rebate for textile exporters has already suggested such a policy shift.

To prevent both economic overheating and severe inflation, the authorities had vowed to adopt a tightening monetary policy late last year.

However, with real interest rates staying negative and piecemeal hikes of bank reserve ratios barely mopping up excess liquidity that soaring foreign exchange reserves brought about, only strict lending quotas have served as a powerful measure to make the monetary policy tight.

One undesirable consequence of such administrative intervention is that SMEs usually become the first victims of credit tightening measures, thanks to the rigidity of China's financial system.

In the first quarter of this year, commercial banks provided loans of more than 2,200 billion yuan, but only 300 billion yuan went to SMEs, 30 billion yuan less than in the same period last year, according to China Banking Regulatory Commission figures.

Statistics also showed that about 67,000 SMEs collapsed due to financing difficulties in the first half of the year.

Clearly, more financial support for small enterprises is badly needed. These firms not only accounted for a considerable portion of the country's GDP growth but also created a huge number of jobs.

Nevertheless, more important than granting more loan quotas for SMEs, policymakers should strive to create a transparent and fair business environment so that they can actively respond to market signals.

A level playing field that guarantees equal access to capital, labor and resources for all competitors in the market is crucial to the long-term survival and growth of Chinese SMEs.

(China Daily August 6, 2008)

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