Despite a government initiative to increase the amount of micro-lending to big banks, it appears that these banks are instead “faking” their micro-loans, leaving 60% of Chinese firms without bank financing. In order to avoid a lack of cash, the government had instructed the state-banks in the country to lend to smaller businesses. Furthermore, to help keep interest rates low, China’s central bank also lowered interest rates twice in the last year. However, a recent study of small business found that 40% of firms were not only not receiving loans, but many of them were also paying interests rates above 6%, demonstrating that banks have not been lowering their collateral standards to help micro-businesses. In fact, many banks require the small businesses to offer up real estate as collateral, when 83% of businesses do not own property.
Small businesses are crucial to the Chinese economy as they account for three out of every four jobs and contribute to 60% of the nation’s output. Therefore it is extremely important to continue lending to them. What can the government do to entice big banks to lower their collateral standards and lend to small business? If this trend continues, what consequences might we see for the Chinese economy?