(China Daily)
Updated: 2007-12-15 10:21

Incentives should be given to financial institutions to finance small- and medium-sized enterprises (SMEs), says a signed article in Oriental Morning Post. The following is an excerpt:

As the central bank announced to raise the deposit reserve requirement for the commercial banks to 14.5 percent from December 25, it has started to tighten the monetary policy according to the decision made at the Central Economic Work Conference earlier this month.

The tightened monetary policy was introduced to reduce excessive liquidity, which is a major cause of economic overheating. But it is necessary to bear in mind whether such a policy will have any negative side effects.

China's financial system is not mature enough, meaning that SMEs are unable to receive adequate funding from the banking sector.

SMEs account for 99 percent of the country's registered businesses, they are responsible for about 60 percent of GDP and they are the most active group in the national economy. However, only 10 percent of them can get loans from banks, and these loans account for just 14 percent of all the money lent by banks.

As a result, many SMEs resort to illegal moneylenders, which is both a risky and costly practice. According to a survey by the branch of the People's Bank of China in Wenzhou, Zhejiang Province, the interest rate for loans from these lenders in November was 11.5 percent every month, while the rate for bank loans was 7.29 percent every year.

SMEs' difficulty in getting enough financing was never eased even when overall liquidity was excessive. And this difficulty evolves into a major one for SMEs seeking long-term development.

With the authorities determined to tighten the money supply, SMEs might encounter even bigger challenges in terms of their corporate financing.

The health of the nation's SMEs is a key element of its economic prosperity. The authorities should try to offer more incentives to financial institutions to support SMEs.

This would not only offer an important helping hand to SMEs, but also a good way to turn excessive liquidity into a constructive factor for the economy.