SMEs in China: Monetary easing won’t be sufficient to reduce credit pressure
When considering risk in the Chinese economy, a lot of the discussion has focused on large State-Owned Enterprises (SOEs) or large private conglomerates. However, headwinds impacting Small and Medium Enterprises (SMEs) should not be neglected. SMEs are scrambling to access financial resources to meet their working capital and long-term expansion needs, amidst a looming trade war with the United States and rapidly deteriorating financing conditions. Given their importance in the Chinese economy, it is likely that policymakers will take steps to prevent SMEs from becoming the weak link. Several measures could be helpful: prudent fiscal stimulus, a rational approach to regulating shadow banking, and a shift to more market-based interest rates so as to reward underwriting procedures that allocate adequate risk returns.
SMEs experienced tighter financial conditions in H1 2018
SMEs are the backbone of the Chinese economy: they account for 97% of total businesses, 60% of GDP, and 80% of total urban employment. Moreover, they are more prominent in the manufacturing and wholesale and retail trade sectors. These sectors have recently come under scrutiny for fear that they may be adversely impacted by increasing headwinds. Manufacturing includes activities that have become subject to new tariffs implemented as part of the US-China trade war. SMEs in these sectors might struggle to absorb the increase in cost, leading to higher credit risks. The wholesale and retail sectors are not exempt from similar pressures, as many of these firms will see the cost of their inputs increased, leading to slimmer margins. Additionally, the