Impediments to SME Access to Finance and Credit Guarantee Schemes in China

Abstract

This paper first analyzes the major impediments for SMEs in China to access finance. It then examines the evolution, categories, legal basis, operating characteristics, and key concerns of credit guarantee schemes (CGSs) in China. Finally, it provides some thoughts on how to make China's CGS sustainable. The author argues that the lack of collateral, credit information and economies of scale of SME loans, coupled with high political risks associated with SME loans are the four major impediments for China's SME finance. The author also argues that with the support and encouragement from the central government, CGSs in China have become important tools for local governments to ensure credits to SMEs. CGSs promote the flow of finance to SMEs by acknowledging SMEs' limited ability to provide acceptable collaterals, by circumventing interest rate controls, and by mitigating risks caused by the poor credit analysis and pricing skills of banks whose loans are to be guaranteed. Sustainable development and proper functioning of CGSs in China, however, may be impeded by government intervention, lack of sound prudential supervision and regulation, as well as interest rate control.