HONG KONG (Reuters Breakingviews) - Giant lenders like the $290 billion Industrial and Commercial Bank of China are ramping up loans to small businesses at the behest of Beijing. That will check their bias towards large state-owned enterprises. But it ignores perverse incentives at work within the banks and it is a misguided way to stimulate private investment.
Officials often view small Chinese companies as proxies for the private sector, which accounts for more than 60 percent of GDP. State-owned banks prefer to play it safe by lending to government-backed clients. In the past, non-bank financial institutions filled some of the gap. However, an ongoing crackdown on shadow banking, since 2017 has choked off this source of credit.
Commercial lenders are being pushed to make up the difference. The government said last month that it wants the biggest banks to increase lending to targeted small and micro enterprises by at least 30 percent in 2019. ICBC, for instance, said on Thursday that it would increase lending to small businesses by more than 100 billion yuan ($15 billion) this year.
Small companies are more prone to fail at short notice without much collateral to recover. To compensate, regulators have said they will tolerate higher non-performing loan rates among such borrowers, but banks are adding cushion. ICBC reported that it lifted such allowances to 176 percent of its non-performing loans at the end of last year, compared to 154 percent a year earlier. China Construction Bank lifted its ratio to 208 percent, from 171 percent in 2017.
Assuming overall lending growth remains stable, the government push would mean bank lending growth to large and medium-sized companies would slow to less than 5 percent year on year as a result, Capital Economics estimates. That’s the rub.
Officials are trying to prevent banks and state-owned firms from gaming incentives for small ticket lending by dressing up subsidiaries as mid-sized business. But while driving credit to the smallest companies is unlikely to come at the expense of government borrowers, it might eat into loan growth for larger private firms, even though they are more stable and have more collateral. That doesn’t serve the banks or Beijing well.
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