Chart of the Week: Can Chinese banks plug SMEs gaping credit crunch?

Loans to SMEs by SOCBs dropped to -4% in 2018 from 12% the previous year.

Credit-starved SMEs are one of the key focus of China's fiscal stimulus as lending to the sector has grown at a slower pace than overall loan growth figures, according to Natixis. 

Also read: Chinese bank loan growth to hit 13.8% in 2019

The loan growth to SMEs for small banks declined from 17% in 2017 to 14% in 2018 although the fall is noticeably  more severe for large banks as lending to SMEs by SOCBs has dropped from 12% in 2017 to -4% in 2018, Alicia Garcia Herrero, chief economist at Natixis, said in a report. 

The government aims to ensure that SMEs will enjoy lower funding costs and that state-owned commecial banks (SOCBs) will play a greater role by increasing their lending activities to SMEs at a pace of 30% in 2019 from the current 28%, Chinese premier Li Keqiang said during the opening session of the 13th National People Congress (NPC).

Also read: Are Chinese banks put to risk as government calls to rev up lending?

To encourage lending to troubled SMEs whose ratio of problem loans to total is more than double for SME lending than the rest, regulators have been unveiling capital incentives to prod banks to unleash funds. These include allowing banks to issue perpetual bonds to improve solvency ratios. The central bank is also ready to accept these tools as collateral for a new liquidity refinancing facility and to buy and hold such perpetual for as long as three years in exchange for PBoC bills. 

"Whilst the sticks are crystal clear, more carrots are being waved around. This is definitely necessary as banks know that there is a price to be paid for stretching the balance sheets and especially so for the private sector," Herrero noted.