The words “Chinese companies” summon images of sprawling tech giants or vast state-owned enterprises, but like most other countries a large share of China’s economy is composed of small businesses — but this critical if unsung economic sector is marginal at best in the Chinese government’s top-down planning schemes. China urgently needs a new way of making financial resources available to the small enterprises that drive economic innovation and adaptation, according to a new policy paper from an influential Chinese thinktank, the China Finance 40 Forum.
- The report notes that current financing arrangements, dominated by large state-backed banks, unsurprisingly directs most loans to big companies with political clout and established access to finance. Further, small companies focused on tech and innovation often lack the kind of collateral needed to secure even modest loans for expansion or new projects.
- Financial markets are also underdeveloped, the report notes. Currently a mere 10% of funding for Chinese companies comes from financial markets, compared to 43% in the U.S. The government needs to loosen its control of financial markets to let them fill this role.
- The government can take a more active role by establishing a policy bank focuses exclusively on small and medium-sized businesses in the tech sector, the report recommends.
- Although shadow banking has a bad name, it is one of the few sources of funding currently available to smaller businesses, and the government should consider tempering its crackdown on the sector.
