New circular seen persuading banks to extend equal treatment to firms

China is expected to further strengthen policy support for the private sector with focus on improving financial services, to sustain economic recovery momentum and stabilize employment, macroeconomic experts said on Monday.

They said they expect better coordination between government departments and financial institutions, which can overcome financing bottlenecks and bolster private enterprises, most of which are mid-sized or smaller.

Their comments came on the heels of a circular jointly released by eight central government departments on Monday, stressing improvement in financial services and noting that financial institutions should accord equal treatment to enterprises.

The departments include the People's Bank of China, the country's central bank, the National Financial Regulatory Administration, the National Development and Reform Commission and the Ministry of Finance.

The circular called on financial institutions to effectively smooth and expand financing channels, including loans, bonds and stocks for private enterprises. Apart from urging banks to increase first-time loan and credit support for private enterprises, it asked them to take the initiative to help private enterprises improve their capital flows. That can be done through efforts like not blindly restricting, withdrawing or cutting off loans while striving for balance between promoting development and preventing risks.

Other priorities mentioned by the circular included optimizing the registration mechanism for private enterprises to issue debt, fully leveraging the role of private enterprise bond financing support tools and expanding the scale of private enterprise bond financing.

"China's economic recovery momentum has been picking up since the third quarter, but small and micro-sized enterprises remain a relatively weak link in the economy," said Wang Qing, chief macroeconomic analyst at Golden Credit Rating International.

"It is highly necessary to strengthen policy support for those enterprises and expand the allocation of financial resources for the private sector," Wang said, predicting loan accessibility for small and micro-sized enterprises will continue to improve while their cost of loans will likely decline.

With the circular issued, outstanding inclusive loans for small and micro-sized enterprises will likely keep growing at above 20 percent year-on-year for a certain period in the future, outperforming that of the overall loan growth significantly, he said.

Li Chang'an, a professor at the Academy of China Open Economy Studies, which is part of the University of International Business and Economics in Beijing, said that liquidity stress has become a severe challenge for many private enterprises, as difficulties and costs in obtaining loans and issuing bonds have aggravated over the past three years.

"The circular has outlined comprehensive principles to address such a problem, and more detailed policy measures by different government departments involved are expected to be rolled out later toward joint efforts," he said.

Given private enterprises' relative inability to contain risk and their lack of quality collateral for financing, more innovative methods should be explored, to motivate potential lenders and creditors while also effectively managing private enterprises' loan or debt default risk, he said.

For instance, the banking system should develop ability to precisely identify financial needs and risks of private enterprises to improve services, while the existing special funds established for small and medium-sized enterprises should play a more capable role, he said.

Xu Wenchao, director of Asia-Pacific financial institutions at Fitch Ratings, observed that the circular mentions cross-department cooperation, aiming to improve disclosure and transparency as well as providing more credit enhancement.

More accompanying measures will come through to increase banks' incentives such as required reserve ratio reduction or tax benefits for associated lending, she said.

Chang Haizhong, executive director of corporates at ratings agency Fitch Bohua, said it is expected that problems, like commercial banks being reluctant to lend to private enterprises and financial asset management institutions being reluctant to invest in private enterprise bonds, will be solved to a certain extent going forward.

Data from the National Bureau of Statistics showed that the purchasing managers index for medium-sized and small enterprises in the manufacturing sector came in at 48.7 and 47.9 in October, respectively, below the 50 mark that separates growth from contraction. The readings were also 0.9 and 0.1 lower, respectively, from that in September.