China's Credit-Starved Economy

Why are China’s SMEs–the beating heart of the country’s economic dynamism–struggling to get loans from the formal financial sector? Local governments are crowding them out.

What's the Latest Development?

Even in good times, it is hard for China’s small and medium-size enterprises to get bank loans. But amid current credit austerity, imposed to contain economic overheating and inflationary pressure, it is worse. In normal times, the informal financial market helps SMEs to get by but it can be very volatile and undependable. Why then, can’t China’s SMEs rely on the formal financial sector to finance their daily operations?

What's the Big Idea?

The main impediment in China is local governments, which compete with SMEs for bank loans and inevitably crowd them out from the formal banking sector, and another key one is the dominance of large banks, which tend to lend to large companies in order to save costs. "The financial sector–the least reformed sector in China–now is suffocating the beating heart of the country’s economic dynamism."

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