Li Keqiang Losing War on Financing Costs; 70% of SMEs Have Seen Financing Costs Rise in 2015

Economic Observer has a front-page article on Li Keqiang's "war" on SME financing costs. The results aren't good so far: financing costs are rising instead of falling. Although the State Council has issued a series of policy initiatives, they're having little effect. Given the complexity of the financial system, it's difficult to pin down where the roadblocks lie, although one obvious explanation is that reform isn't taking place: local governments and SOEs are still grabbing the lion's share of credit. An even bigger problem may be the depth of the economic slowdown. According to the article, demand for credit clearly fell in June and July, signaling the business climate is turning for the worse. Finally, in light of the recent editorials announcing 'unimaginably fierce resistance' to reform efforts, this article is another log on the fire.

For Premier Li Keqiang, 2015 is an unusual year.

...In March this year, the Prime Minister made a number of specific objectives in the government work report, lower financing costs, lower social security contributions, reduce business barriers ...... the government work report is a military order and these goals are the prime minister "war."

Now is the time to confirm the victories.

Throughout the first half, Zhang Chenghui was all over the country fact finding. Recently her findings leaver her dismayed, because she found that the financial and the real economy is further out of step.

As the Director-General of the Research Institute for Finance, Development Research Center of the State Council (DRC), Zhang Chenghui has repeatedly said publicly that, although regulators are very concerned about the difficult and expensive financing of SMEs, and the central government has introduced all aspects of policy trying to solve these problems through policy measures, but the actual result is not very good.

"From a practical point of view, I am afraid from the solution to the problem is still a long distance." Blending said.

...Premier Li Keqiang is clearly aware of this problem. In the executive meeting of the State Council on August 13, he again issued a document designed to resolve the problem of SME financing called "on the promotion and financing guarantee industry to accelerate the development of idea" hoping to develop financing guarantee industry, will More finance "Living Water" directed small and micro enterprises and the "three rural."

This is the beginning of this year, Li Keqiang at the 12th executive meeting devoted to financing costs.

However, the unexpected is the plight of corporate financing costs have not yet been resolved, new issues are coming out now signs. The Minsheng Bank Shenzhen Branch general manager of SME financing Ma Changjiang told the Economic Observer that since June this year, you can feel the exact funding needs of small and micro enterprises declining. July this year released "Economic Daily - China Postal Savings Bank SME Index" confirms this phenomenon.

Data show that SME Index edged down 0.2 points from last month. "This shows that the SMEs are under powered, financing capacity decreased, financing demand is declining." Fiscal Science Research Institute researcher Li Quan to the Economic Observer reported.

Apparently, the high cost of corporate finance is not an isolated incident, for Premier Li Keqiang, it is like a war that requires the mobilization of all forces.

Limited decline

In early June, Zhang Chenghui has just returned to Beijing from a prefecture-level city in eastern China, the local Finance Office told her about financing problems.

In a SME park there are more than 90 small and medium enterprises witn an output value of 700 million last year, taxes of 15 million, but only two commercial banks provide financing for these more than 90 companies, the vast majority of SMEs rely on loans between friends to maintain normal production and business activities. Only a little more than 30% the entire city's SMEs have bank credit cards. "If you have a credit card, the bank does not necessarily give you loan. The credit card is only a preliminary step to get funding, it only means the SME has gone through the bank's credit evaluation, the second step of the problem is to obtain financing." Zhang Chenghui say why banks are reluctant to give small and micro businesses loans, in fact, say the reason is simple, because the risk is too high with SMEs. Although the interest rates can go up, the risks posed by interest rates going up makes the banks feel there's no money to be made.
Banks can raise interest rates on SMEs, but since that's likely to bankrupt the business, they can't raise rates. Hence, the market cannot compensate banks for the perceived risk. Banks are giving up on lending to SMEs and have stopped putting out SME reports:
In the past few years, a number of commercial banks have announced small and micro enterprises report. However, according to the Economic Observer newspaper reporter's partial survey, this year there are no published research reports, a commercial bank in this regard, even some banks drastically reduced to small micro-enterprise loans of investment. A joint-stock bank source reasons, only if the results are good will banks publish a report on the industry. This means that this year the banks are struggling to make progress in the SME business.
So the central bank has cut interest rates and reserve requirements:
To this end, from last November to June this year, the central bank has been 4 times lower deposit and lending rates, total loans from financial institutions cut the benchmark interest rate 1.15 percentage points year on year benchmark deposit rate by 1 percentage point. "Interest rates with lower standards, both to increase the financing needs of the real economy, but also increase the money supply, the long run is more conducive to steady growth, structural adjustment." People's Bank of China survey Division Shengsong Cheng stressed that the RRR three times this year too provide the market with ample liquidity.

On effect in terms of policy, lowering interest rates played a role in real accurate. People's Bank of China data show that as of the end of June 2015, the weighted average interest rate of the new loans was 5.97 percent, over the previous year fell 64 basis points, down 101 basis points over the previous year; the central bank on the real economy through loans, bonds, stocks and other Comprehensive assessment of all types of financial instruments and financing costs showed overall financing cost of 6.32 percent, over the previous year fell 68 basis points, down 85 basis points over the previous year.

However, Zhang Chenghui's research shows that although the central bank cut interest rates and RRR several times, 70% of the loan interest rates went up, only about 10% of the loan interest rate declined, and the remaining 20% ​​of the loan use the benchmark interest rate.

"I figure a bit based on the Wind database, since the end of September 2013 to the end of May 2015, average loans from financial institutions dropped from 6.65% to 6.56%, P2P net loans fell 12.75%, Wenzhou's private lending interest rates fell 1.69 percentage points. Figures show non-formal financial institutions outside the system of financial institutions, the central bank lowering quasi reflect much faster than formal financial institutions, formal financial institutions interest rates fell an average of only 0.1 percent." Zhang Chenghui said.

While banks generally believe that easing monetary policy can reduce financing costs, it's not a permanent solution. Minsheng Bank Shenzhen Branch President Wu Xinjun said its SME lending rate fell from 7.8% at the beginning of the current year to 6.8% presently, if there is further easing of monetary policy, SME lending rates could fall further, but based on cost factors, the room to fall is limited.

New Problems

On the one hand is the limited enterprise financing costs decline, on the other hand is the economy continues downward, further deterioration of the business environment, resulting in further decline in corporate profits.

Zhang Chenghui said this year first quarter profits of industrial enterprises decreased by 2.7%, the average lending rate is 6.56%, companies need to pay this year about 5 trillion in interest. The 2014 full-year profits of Chinese industrial enterprises is less than 6.5 trillion, much of the profits are used to pay interest.

And if you use the actual interest rate to calculate interest payments, they may reach 8 trillion, plus add in the producer price index (PPI), the real interest rate for enterprises soars to 11.1%.

The second quarter may be an even worse situation. Shenzhen Huaqiang North a business owner told the Economic Observer newspaper reporter that at present he can afford financing costs of less than 8%; if higher, then profits will be difficult to cover the costs, then companies may abandon real world financing, even turn to the virtual economy trying to "fight one."

Obviously, the financing problem has not been completely solves and new trouble ensued.
The new problem is the same one facing the West: peak debt. There is reduced demand for credit.
"Falling interest rates is a good thing, but on the other hand is not necessarily a good thing. Why? Explained a lot of money, does not flow out." People's Bank of China survey Division Shengsong Cheng said the RRR actually make more bank financing, but Supply does not necessarily mean more demand, is now not only bank willing to issue loans, as well as the real economy is not having a valid funding needs, and this is the most fundamental issue.

In early August, Minsheng Bank Shenzhen Branch general manager of SME financing Ma Changjiang told the Economic Observer newspaper said that since June this year, you can precisely feel the funding needs of small and micro enterprises declined. The owner of Huaqiang North, an electronic accessories business also said a large amount of office space has not been rented out for many years.

Where is the enemy?

The State Council and its affiliated ministries have frequently issued policies, why has there been limited results?

"Allocation of financial resources is overweighted towards the government, big business, to SMEs low or not at all, is the inevitable logic." The central bank research bureau director Lu Lei said.

In Lu Lei's view, the "real economy sector - the Central Bank - Financial markets - Financial institutions - the real sector" in fact constitutes an extremely complex economic system, but also in all aspects and institutions involved in the process of dynamic game of incomplete information on the before responding to the effect of different policy responses, the most critical is, it is difficult to distinguish the precise financial resources amuse themselves in the second round or in the third round take chances. "A lot of money into the capital markets, but the money did not enter the real economy." Zhang Chenghui told the Economic Observer, due to the relatively slow development of China's capital market, while the structure of the financial system is also a problem, the current state-controlled big banks dominate China's financial system. Such a financial structure for financing SMEs is undoubtedly a disadvantage because large banks operating costs will be relatively high, pay more attention to economies of scale, generally big banks do not adapt naturally to small and medium enterprises.

In this regard, Shengsong Cheng also told reporters that the media briefing, relying solely on monetary and financial policies, financing your problem can not be solved fundamentally, we need a combination with short-term policies.

Such short-term policies include agriculture support to small farmers and then increase the loan amount, the total amount of such policies directed to reduce the deposit reserve ratio, including direct financing expansion, increase the proportion of foreign currency financing, the pressure drop and the industry balance sheet financing, the use of prudent macroeconomic management boot of credit and other structural policies, including cleaning up banks arbitrary charges, regulate private financing, to promote municipal bonds and other special bonds and selectively break the cycle and some other rigid payment complementary policies.

Currently the central bank introduced a variety of policy precisely Shengsong Cheng alleged short-term policies, and to develop long-term policies include direct financing, gradually reduce the proportion of indirect financing, and actively promote the marketization of interest rates and so on. Vigorously develop the bond market, stock market and achieve standardization of all types of financing development, and create a fair competitive market environment. Improve financial market infrastructure, expand market access and so on.

Clearly, considering financial reform has a "butterfly effect" and reducing financing costs is a long-term policy, it is destined to be a very long wait.

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