China’s Repressed SMEs

Financial repression – government policies that lead to low or negative real interest rates, with the implicit goal of generating cheap financing for public spending – has long been a key feature of Chinese economic policy. But, with funding costs for businesses trending up, this needs to change.

BEIJING – Financial repression – government policies that create an environment of low or negative real interest rates, with the goal of generating cheap financing for public spending – has long been a key feature of Chinese economic policy. But, with funding costs for businesses trending up, this is finally starting to change.

Early this year, the State Council, China’s cabinet, made lowering funding costs for businesses, especially small and medium-size enterprises (SMEs), a top priority. For its part, the People’s Bank of China (PBOC) has engaged in cautious monetary loosening, which includes freeing up more funds for lending by banks that allocate a certain proportion of their total loan portfolio to SMEs. The PBOC, through its “pledged supplementary lending” program, has also started lending directly to banks that have promised to use the funds for social housing construction.

But, so far, efforts to lower funding costs have had a limited impact. Indeed, the weighted average interest rate on bank credit to nonfinancial enterprises remains close to 7%, while economic growth has edged down from 7.4% year on year in the last three months to 7.3% in the current quarter.

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