Some domestic financial institutions will be carefully selected to test the new programme.

The proposal was made by a leading international consulting firm in micro and small enterprise finance, and has yet to be approved by PBOC, China's central bank, a source said.

The programme would ensure China's small and medium-sized enterprises (SMEs) have an easier time obtaining bank loans for business expansion, by making this financial service more profitable to banks.

It proposed that China's commercial banks could charge higher lending rates and secure larger net interest margins (NIM), to offset the higher costs and risks involved in making SME loans.

Specialists invited by the World Bank and the PBOC are now conducting a feasibility survey in Beijing to prepare for the implementation.

Most of China's SMEs are privately owned and are regarded as the most dynamic players in the country's economy. They have provided and will continue to provide most of the newly-created employment opportunities.

But their development is seriously hindered by the lack of a quick and adequate financing channel to commercial banks.

China's existing narrow interest rate margins are considered a major constraint for banks lending to SMEs.

Commercial banks cannot make handsome profits from SME lending, which is more costly than lending to large State-owned enterprises.

However, China's restrictions in interest rates are still tight. The 30 per cent increase for SME lending is not sufficient to make it a profitable financing service.

(China Daily February 5, 2005)