Govt urged to seek ways for SME financing

China's policymakers need to set up a system to improve transparency of private companies and use innovative programs such as public-private partnership to encourage private participation in infrastructure projects, financial industry executives said at a session of the World Economic Forum on Wednesday in Tianjin.

Majority of the country's private companies are small and medium-sized enterprises (SMEs) and are underfunded, but it is not just the fault of the financial institutions for not financing them, said Wei Sun Christianson, CEO of Morgan Stanley China.

The SMEs contributed to 60 percent of China's GDP, 80 percent of the total jobs and 50 percent of the tax revenues, she said. "Alarmingly, only 3 percent of the 10 million SMEs have access to bank loans, that is something seriously wrong," Christianson said.

The difficulty in channeling the funds to these companies lies in evaluating their creditworthiness, because they lack collateral assets or guarantees and there is insufficient reliable credit information, according to Christianson.

It is getting more and more difficult to get reliable information about these companies in China, even about their balance sheets, debt levels or litigation records, she noted.

SME financing is key to long-term sustainability of an economy, but financing unlisted SMEs is as risky as financing a hedge fund, Victor Lu, chairman of Hong Kong-based First Eastern Investment Group, said during the session.

Christianson suggested the government make it easier to access credit information related to private firms, including establishment of registration system for lawsuits, access to corporate governance filings and permitting more private rating agencies.

Meanwhile, Lu advised that the government should consider adopting the private finance initiative, which has proved to be successful in the UK, for building small infrastructure projects.

China has been encouraging more private investment in areas including infrastructure construction that used to be led by the State-owned enterprises, in a bid to buck the economic slowdown since May.

"Small infrastructure projects belonging to the State do not have to be exclusively funded and managed by the government," he said.

For a local public project such as a hospital or a school, the government can bring in private companies for the construction, and the government can commit to use the property for 20 to 30 years, Lu noted.

Because the project is thus backed by the government, banks will be more willing to lend to the private companies involved, Lu said.

"This provides opportunities to the private sector and especially the SMEs."