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The financial crisis has made it more difficult for the small- and medium-sized enterprises (SMEs) in China to conduct financing through current financing channels. But these SMEs also need to review their own investment strategy.

Encouraged by the government investment, how much support did the SMEs receive from the sufficient capital? The Ministry of Industry and Information Technology (MIIT) and the four major state-owned banks in China (Bank of China, Industrial and Commercial Bank of China, China Construction Bank and Agricultural Bank of China) gave out two complete different answers to that question?

According to the data of the four major banks, they had lent 6 trillion yuan (USD 877.99 billion) to the SMEs by the end of May. However, the Minister of Industry and Information Technology Li Yizhong said that 4.8 trillion yuan (USD 702.39 billion) was added to the total amount of credit lending in the first three months, but only 5% came to the SMEs.

Chen Aiguo, partner of Shanghai Win Capital Pte. Ltd. said that SMEs should make the others see their own value. In his opinion, under the impact from financial crisis, many entrepreneurs gave up the recycling investment in their own business. How could they get the support from the financial capital?

Bank Investigation: High Risk in Lending Loans to SMEs

An explanation to the large gap between the amounts of credit to the SMEs is that the MIIT and banks have different definition about the SMEs. In the opinion of the MIIT, representing the market, SMEs are those enterprises with annual income of less than 5 million yuan (USD 731.66 thousand), while the banks think that they are the enterprises whose annual income is less than 100 million yuan (USD 14.63 million) or even 200 million yuan (USD 29.27 million). In truth, this gap reflects the basic principle of the banks in the credit lending business – scale effectiveness.

According to Wang Shihao, Deputy Director of Bank of Shanghai, a difficult point for the banks to lend loans to the SMEs is that the process of checking the risk of lending loans to them is similar to the one of lending loans to the large enterprises, but the amount of loans is quite small. Judged from the cost of income, this business is not very cost-efficient.

Another “cost-inefficient” aspect is the income risk. Zheng Liangyu, Deputy Director of Shanghai Branch, Bank of Communications, thought that the real income for a bank is the income with no risk. The banks are not willing to lend loans to the SMEs because many SMEs corporate governance structure is not very complete and they usually have less strong ability of fighting crisis. During the period of economic depression, it is more likely to see bad debts between banks and SMEs.

A survey made by Bank of China showed that the average scale of the SMEs is only one seventy-sixth of the large enterprises while their market share is one twenty-sixth. The Non-performing Loans (NPL) ratio for the whole financial industry in 2008 was 2.4%; however, the NPL ratio for the SMEs was 11.6%. So lending loans to the SMEs is a high-cost and high-risk business for the banks.

Risk Investors: Banks Should NotAssume All the Responsibilities

In Chen Aiguos opinion, the banks are not interested in the future of the SMEs. They care about how much capital they have accumulated in the past. This is different from the professional risk investors and starting investors who attach importance to the prospect of the companies. So it is reasonable that the banks prefer to lend loans to the large enterprises rather than to the SMEs. The SMEs can not attribute the difficulties in financing to the banks.

Chen also thought that the current financing channel can not solve the financing problem for the difficult problems. The SMEs also need to review their investment strategies against the current background. “If the entrepreneurs dont invest in their own companies, how can they convince the others to make investments?” said Chen. If the SMEs want to gain the favor of the financial capital, they must increase the investment into themselves.

Presently, the SMEs face the problems of narrow direct financing channel. Apart from the unconsummated capital market, many owners or major shareholders of the SMEs are not willing to put their money in production under the influence of crisis; instead, they would rather put money in the stock market or real estate market.

“Any real industrial economic system should rely on recycling investment of capital to realize the normal operation and production expansion,” said Chen. “It is a worrying phenomenon that some SMEs owners have broken this recycling system. The government macro-economic adjustment has brought influence upon the SMEs instead of the large state-owned enterprises, resulting in the shrink in the scale and market share of the SMEs. We must pay attention to it.”

Inside Point: “Second Board” Cant Satisfy the SMEs Need

In the current situation, the “Second Board” may be the best way to solve the financing problem of the SMEs. However, many experts are not very bullish on it.

“The essence of the security market is to collect the unused social capital and give it to the enterprises having urgent need of money,” said Chen Aiguo. “But the current market situation is like a closed speculating market.”

The Chinese A share market went through a large retraction from November 2007 to the end of 2008. Due to the impact from the global financial crisis, the government issued some policies to stop IPO, in order to keep the stock market stable. At the same time, a large amount of equity funds entered the market. “This is good for the stockers,” said Chen. Its defect is also easy to see, which is to cut the connection between entity economy and capital market. There, it is not an effective way to solve the financing problem. Even the “Second Board” can not fully perform its financing function if the regulatory departments dont change its start point of adjusting the market.

The director of Corporate Magazine Niu Wenwen gave out the same views in a forum. In his opinion, the “Second Board” is the stage for the enterprises with high production capacity and high growth rate. Therefore, most of the SMEs are excluded from it. Most of the SMEs in Yangtze River Delta Areas dont have a high growth rate. Even some famous SMEs dont have the qualification to be listed on the “Second Board”.