Cheaper credit and a bit of political prodding appear to have increased the flow of lending to China’s struggling private sector.
But most loan applications are still being rejected while approvals come with stiffened collateral and due diligence requirements, as banks try to balance the competing priorities of managing risk with political calls to support the economy.
Our survey of 36 small and medium-sized private companies found 16 of the respondents, or 45 per cent, saying it was easy to get a collateralised bank loan, up from just 6 per cent last September. As a result, nearly two-thirds of respondents said they had borrowed from banks over the past 12 months, compared with less than half previously.
With the caveat that this is a relatively small sample, the improvement in credit flows reflects intensifying support for the private sector as the economy slows.
The People’s Bank of China (PBoC) has slashed its reserve requirement ratio since the start of last year, letting trillions of renminbi back into the system, to encourage banks to lend more to smaller, private companies.
Press mentions of the phrase “do not call in loans” (不抽贷 or buchoudai), which is a quiet instruction that banks should keep rolling over loans, are at levels not seen since the economic turmoil of 2015 and 2016.
Business owners said securing a line of credit had become easier compared with just a few months ago when they could not even get a meeting with the bank. Meike Henghui, a sanitary towel manufacturer in Hangzhou, took out three loans, worth a combined Rmb37m ($5.5m), in the final months of last year after loan officers finally agreed to take meetings.
“Loan officers are asking to come to my office — they have small business lending quotas that need to be filled,” said finance director Yang Quanwen.
Instead of having to go through a broker, which can carry charges of up to 2 per cent of the principal, most respondents said they now had direct access to banks and had room to negotiate, rather than being handed down terms and conditions. Lenders are also speeding up loan application reviews. Our survey found 27 per cent of respondents saying their loan applications were happening more quickly, compared with 6 per cent last September.
Falling interest rates are helping. Although the government’s benchmark interest rates have not been cut since 2015, the central bank has been guiding market rates lower. Among respondents to our survey, 41 per cent said their borrowing costs had fallen, compared with 12 per cent in September.
In Guangzhou, Ziyuan Environmental Technology, a water treatment company, borrowed Rmb10m in December at 4.12 per cent, down from 6.53 per cent last August. A Ziyuan executive said the company negotiated a lower rate by shopping around the banks.
“In August we could barely find a lender, let alone a preferential rate,” the executive said.
Plenty of strings attached
The PBoC’s January lending data, due in the coming week, are expected to show a huge increase in new loans. Banks typically front-load annual lending activity to maximise interest income, while there is more official encouragement to dole out loans this year.
However, increased lending activity does not necessarily mean an immediate rebound in Chinese economic growth. Most of the companies surveyed said they were not taking on loans to invest in long-term, productive assets. Among respondents, 20 of the 36 surveyed said they were borrowing to meet day-to-day operational needs, a trend reflected in PBoC data which show that a growing proportion of monthly lending in China is short-term or bill financing.
Banks would rather keep the term of loans short because of the risks of lending to vulnerable private firms relative to the risks of doing business with larger, state-backed firms. All six of the loan officers interviewed for our research said they had increased collateral requirements, while just 18 per cent of surveyed companies said they could borrow without providing collateral over the past 12 months, down from 37 per cent last September.
Successful borrowers also face more scrutiny from their creditors. Chen Dayin, owner of a copper mine in southern Hainan province, is getting used to bank representatives making monthly visits to his company, up from once a quarter, to see what is happening with their Rmb10m loan.
Loan officers in Beijing and Wuhan said they were only working with private firms that are industry leaders, key suppliers to industry leaders or getihu, small private companies not much bigger than mom and pop shops. That leaves the vast swath of medium-sized firms, which lack suitably long track records or sufficient collateral, out in the cold.
Huaxing Bank, which is based in the southern city of Shantou, reported 39,456 small business borrowers at the end of last year, an increase of 25,682 from the year earlier. But the lender explicitly prefers getihu because they only need small loans of no more than Rmb300,000, helping to control risk.
A shortage of quality borrowers also makes it harder to fill lending quotas. Despite official entreaties, bank executives are reluctant to relax lending standards too much because non-performing loans can harm their careers. The result is that lenders such as Huaxing Bank approve fewer than one in every five loan applications.
“We conduct very strict credit checks — we’re looking at utility bills as well as income statements,” said a Huaxing loan officer.
In fact, whole sectors are off limits in the current climate. An official with the Foshan branch of China Construction Bank in Guangdong province admitted he only worked with pharmaceutical, clean energy and technology firms.
Traditional manufacturers and sectors caught up in the US-China trade dispute have been quietly blacklisted.
“We may miss out on some good quality clients but that helps avoid bigger industry-related risk,” the Construction Bank official said.
scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research