China's Lenders Target SMEs as Credit Boom Loses Steam

China’s credit boom may be losing steam, but the outlook for small and medium-sized enterprises is improving, according to Moody’s


Sherman Chan, economist at Moody’s, says that new loans averaged 1.2 trillion yuan per month during the first half of the year but slowed to 356 billion yuan in July, and unofficial reports suggest the August figure was also only around 370 billion yuan. The massive slowdown in lending has worried market watchers, as the recent pickup in growth momentum has been largely due to robust credit growth. That said, results of a recent banking survey on senior management suggest that the best for SMEs is yet to come, with 80% of lenders indicating intention to focus on SMEs in the near term.


“SMEs have thus far been left out of the credit boom on the mainland, as banks have favoured large companies, especially state-owned enterprises,” explains Chan, adding that the intended switch in focus likely reflects banks’ desire to diversify their loan portfolios, which are now heavily concentrated on infrastructure projects and the industries that have received special support from the central government. Chan adds that banks are also motivated to expand credit to SMEs because the market for large enterprises is now saturated after a surge in lending during the first half of the year.


However, Chan stresses that SMEs should not expect all smooth sailing from now on as banks have become more cautious. Chan explains that loan assessments are expected to be more stringent than earlier in the year, when the focus was almost solely on reviving the economy as per government direction. “Banks are now wary of increasing bad loans in the next couple of years and have therefore raised provisions,” says Chan.


Meanwhile, although the authorities are likely to keep monetary policy accommodative for the next six months to support the economic recovery, the tightening cycle may commence as early as the second quarter of 2010. “Therefore, banks are likely to have already started tightening their stress tests when assessing loan applications, and uncompetitive SMEs may continue to struggle in gaining access to credit,” says Chan.


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