Capital dilemma

China's central bank, the People's Bank of China, has removed the credit ceiling for commercial banks, cut requirement ratios twice and interest rates three times since September.

But many local officials and enterprises confessed that the domestic financing environment was not really improving as commercial banks tended to issue loans sparingly in the difficult times for fear of bad debts.

"We've seen a general guideline that banks should lend more to small and medium-sized enterprises. But without specific measures from commercial banks, the policy can hardly be implemented," said Tu Qinhua from Jiangxi.

Yuan Wentao, secretary of the Yanshi City Committee of the Communist Party of China in Henan, echoed that after shareholding reforms, China's major commercial banks (Industrial and Commercial Bank of China, China Construction Bank and Bank of China) had all gone public and changed from "solely state-owned" into "having a diversified ownership".

"That means banks would no longer bow to government orders," he said.

An insider of the banking industry said that commercial banks' in-house evaluation system held loan officers responsible for every non-performing loan they had granted. As a result, few loan officers would risk losing their jobs to help a company that fell into financial difficulties but had a good market prospect.

But there are people who advocate banking prudence. Unlike the Western economy which slipped into recession after the collapse of financial markets, China's concern should be the other way around because the country's weakening tangible economy may hit its banking system which might lead to more serious trouble, they say.

To remedy the situation, the State Council, China's Cabinet, held an executive meeting on Thursday, deciding to stimulate the "credit distribution enthusiasm" of commercial banks through "optimized supporting policies" and "innovative mechanism".

To be specific, local governments were encouraged to channel fiscal input into credit guarantee companies to help activate the money-lending of commercial banks. Moreover, tax break will go to private credit guarantee companies servicing small and medium-sized enterprises.

Yuan Wentao thought this measure "viable" but contended that credit guarantee should utilize more social funds to avoid the concentration of credit risk to governments.

Four years ago, Yanshi city government set up a credit guarantee company with its 10-million-yuan registered capital coming from fiscal input. No bad or non-performing loans had occurred yet.

This month, Yuan will also organize a special meeting where a number of financially-strained local companies with good market prospects will be recommended officially to banks.

In response, Anhui Province's Wuwei County government has planned to spend 30 million yuan setting up credit guarantee companies. As the guarantee premium was capped at one percent of the credit, much lower than the market average, local credit guarantee companies would receive subsidy for the premium spread until June.

Moreover, a risk compensation fund of two million yuan has been launched to offset a certain proportion of the losses that financial institutions may derive from extending loans to smaller enterprises.

To alleviate industrial burden, Wuwei county government also promised to cover two percent of the newly increased interest payment for industrial enterprises who secure loans from designated financial institutions by the end of June.

The whole stimulus package would cost Wuwei County a fiscal input of 60 million yuan, about 5.5 percent of its 2007 fiscal revenue of 1.1 billion yuan. But in some less developed counties where fiscal outlay heavily relies on central government's transfer payment, capital strain has been a long-standing headache.

As the central government's 4-trillion-yuan stimulus package required local government to pay a counterpart fund from local finance, Lian Weiliang, secretary of Henan's Luoyang City Committee of the Communist Party of China, said this might be the time to consider allowing local governments to issue bonds.

Confident about the ongoing battle with the slowdown, Wuwei County magistrate Lian Xuwen said that the first quarter of next year would be a proper time to evaluate the effect of these stimuli and consider a policy adjustment.

(Xinhua News Agency December 6, 2008)