Small, micro firms in China are hungry for long-term loans

From - http://www.chinadaily.com.cn/china/2013-04/07/content_16379110.htm

China's small and micro enterprises are still struggling with lackluster business, and most badly need long-term rather than short-term loans, said a report based on a survey released on Saturday at the Boao Forum for Asia.

Of the 1,000 small and micro enterprises surveyed across China, 56.7 percent said their order numbers declined or stayed flat last year compared with 2011, and 57.7 percent said profit dropped or kept flat in 2012. In addition, 49.9 percent complained about an unstable workforce.

One-third of SMEs need medium- and long-term loans to upgrade their equipment or invest in new products, the survey found, yet 63.3 percent of loans they got were short-term, less than a year.

Zhang Xuyang, general manager of the retail department of China Everbright Bank, is interviewed about the "Report on Small and Micro Business Financing Development". [Huang Yiming / China Daily]

"This stands in conflict with the fact that driven by fiercer competition, 39.3 percent of SME shave considered improving their product quality, 43.9 percent of SMEs have considered extending their product chain and 27.7 percent have considered upgrading their technology,"said Ba Shusong, a banking expert with the Development Research Center under the State Council, who led the research.

A revelation of the report is that though 66.7 percent of SMEs regard bank loans as a primary financing measure, 62.1 percent of them do not now have them.

Yao Wang, executive president of the Research Institute of the Boao Forum for Asia, said SMEs have little expectation of getting bank loans.

"The survey showed most SMEs don't have bank loans. They don't expect to get a loan from big banks. This is pathetic," Yao said.

In consequence, SMEs sought financing from family members and friends - 24.3 percent of micro enterprises and 7.5 percent of small enterprises. They are much less aware of the multiple new financing methods: 38.8 percent of SMEs, for example, do not know about intangible assets mortgages.

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So it's not only British banks who are shy of lending to SMEs!

Banks at fault

A large part of the problem with the world economy lies with major banks. I don't mean domestic banks offering current and savings accounts for consumers; but commercial and investment banks who lend money to businesses and governments and - at the same time - buy and sell shares and offer all manner of so-called financial instruments.

When they first formed, banks were there to lend money to those who needed it - such as farmers with a poor harvest, parents needing funds for a good wedding, or a merchant who needed to buy stock to sell - and charged a fee or interest. In Europe, many bankers were Jews as due to religious prejudice they often not allowed any other 'respectable' trade. And lending was associated with usury and deemed below the dignity of the upper classes who could have afforded to operate them. Soon banks were lending to kings to fight expensive wars, such as the crusades. Where possible, banks demanded security in the form of assets: a cow, a house or future tax revenues. Initially, the flow of money was largely the initial capital supplemented by the interest charged or the defaulted security.

Later, bankers wanted to lend more than they had, so 'financial instruments' were invented. The recent (2008) financial disaster was laid in the 80s when domestic mortgages were 'securitised'. That meant banks could bundle mortgages and trade them with each other. Initially, it increased the amount banks could lend.  But, as with the US Fannie Mae, many bundles of mortgages included large percentages of so-called sub-prime, high risk mortgages. But as the bundles were re-bundled and sold on, nobody had the time to read all the documentation (which presumably spelt out the risks) much less take them seriously  The net result was: 
1. A large number of Western banks ended up owning a lot of high risk 'assets'
2. The total value of these so-called assets were n times the face value, never mind the risk-discounted real value.
3. When some mortgage holders started to default; the whole 'pyramid' scheme was exposed for what it was and the whole house of cards (pun intended) collapsed.

Roll forward to the Euro crisis. Many countries borrow up to a high % of their GDP. But some countries borrowed well above a single year's GDP, including Greece, Spain and so-forth. How did this happen?  The same investment banks were involved. They encouraged the finance ministers by offering what looked like cheap money with long life cycles. Once again, it took one country to look like it couldn't meet the interest payments and, once again, the pyramid started to collapse - though for the short term it is being propped up.

So, my bottom line is that whereas banks were and are a valuable institution, they have been allowed through various national and international deregulation to become gambling houses, where the stakes, risks and rewards are high. Not only are they now endangering world economy but also subverting things like - in the US and UK - causing the best and brightest from universities to go into banking disproportionate to the value add, instead of into engineering and manufacturing.