Banks need to change their attitude towards private enterprise
- Despite repeated requests from Beijing for state-owned banks to lend to the private sector, it is still difficult for small and medium-sized firms to obtain credit
Communist Party leaders are going to allow market forces to play a “decisive role” in allocating resources. That is from a Post report after the third plenum of the Central Committee in 2013 that was supposed to set the direction for China’s development over the next decade. But giving private enterprise a bigger role has proved easier said than done. Testament to that, five years later, emerged in the current session of the National People’s Congress. Premier Li Keqiang promised tax relief and more lending to firms to help stabilise the economy and boost employment.
That sounds familiar. But what sets this NPC session apart is that delegates are talking openly about difficulties facing the private sector and laying the blame on state-owned banks. Despite repeated requests from Beijing to lend to the private economy, it is still difficult for small and medium-sized firms to obtain credit. As a result, delegates say, some are in dire straits and even going bankrupt.
Frustration and a sense of urgency about their plight reflected in talk of a negative mindset among some officials. They have no appetite for the risk of lending to private firms when they can take the safe option of lending to state-owned enterprises with their implied government guarantee. This does not make sense in the bigger picture of the economy. According to official figures, private firms contribute more than 50 per cent of tax revenues, 60 per cent of gross domestic product, 70 per cent of exports and 80 per cent of jobs.
It is too easy, however, to put all the blame on these officials. It is a vicious circle. Private firms lack the credit history and banking relationships of SOEs. Not only does this make it harder for officials to be confident about extending credit, but when they do so it results in a higher bad-debt ratio. They have an understandable fear that if a small-business borrower defaults, it will do their careers no good.
Once again, the central government has set the right direction of giving the private sector a greater share of resources. But this time it must support the directive by facilitating a change of attitude from the banking system. It remains easier said than done. First, there is still a need to establish a good credit system so banks can easily check a firm’s credit history. Second, there must be cultural change to reset the mindset of officials. They ought not fear being held to account for bad debt if they have carried out due diligence.
Freeing up credit is just one aspect. To reflect the pivotal role of the private sector in sustaining economic growth and social stability, there is not only a need for more trust in private enterprise from officials, but also more trust in the justice system from businessmen. If businesspeople think they cannot win against SOEs, they will not have the confidence in the legal system that is paramount to expansion of their role in the economy.
