The Ministry of Finance signed an agreement with Germany's KFW on Friday in Beijing to borrow 19.2 million euros (US$21.7 million) in government loans from Germany, which will be used to finance Chinese small and medium-sized enterprises (SMEs).

The loans, part of the third phase of the Sino-German Financial Cooperation SME Credit Program, will come in two forms - one-third will be 10-year commercial loans and the other two-thirds 40-year soft loans, or government loans that can be repaid in the borrower's currency.

The program will be undertaken and operated by a third party, the China Merchants Bank (CMB), a shareholding commercial bank based in Shenzhen. The Ministry of Finance also signed a deal with CMB to underwrite the loans.

Different from ordinary foreign government loans, this credit program will enable the loan undertaker, or CMB in this case, to choose the loan projects and shoulder the related risks itself. CMB can also grant renminbi-denominated loans, as part of the program, to domestic enterprises who can use the money to purchase domestic equipment.

But a prerequisite is that the loans should be used mainly to finance fixed-asset investments of non-State SMEs, according to the agreement.

It is stated in the program that the borrowers should be private enterprises or joint ventures in China, in which the State share is less than 50 percent. And they should be SMEs with long-term assets or an annual turnover of less than 500 million yuan (US$60.4 million).

KFW, the bank controlled by the German Federal Government that provided the loans, will give credit risk control training to the Chinese bank to help them improve credit management.

"We will try to find the most appropriate projects because we will shoulder the risks ourselves," a spokesman with CMB said.

CMB is not the only Chinese bank to get loans from Germany.

Back in March KFW granted a loan of the same size to the Ministry of Finance, which was undertaken by the China Minsheng Bank, a private bank based in Beijing.

The two loans together form the third phase of the Sino-German SME credit programme, which involves around 40 million euros (US$45.2 million), said Christoph Isenmann, deputy director of the KFW Beijing office.

The first and second phases of the SME credit programme were conducted a few years ago, with the loans undertaken by several other domestic banks, including the China Import & Export Bank, KFW sources said.

(China Daily August 16, 2003)