Credit Pressure Impacting the Chinese SMEs

5 JUNE 2019

SMEs are the main force of the Chinese economy: they account for 97% of total businesses, 60% of GDP, 70% of import/export trading revenue, 80% of total urban employment, and more than 50% of national tax revenue.

In the European Union (EU), SMEs are companies with fewer than 250 employees and an annual turnover not exceeding EUR 50 million. However, in the context of an economy as vast as China’s, the definition of an SME is more complex, which differs by sector as below:



No. of Employee

Annual Operating Income

Agriculture, forestry, animal husbandry & fishery


< RMB 200 million


< 1,000

< RMB 400 million

Distribution & wholesale


< RMB 800 million


< 300

< RMB 200 million

Hotel and catering

< 300

< RMB 200 million

Information transmission

< 2,000

< RMB 100 million

Software & information technology

< 300

< RMB 100 million

Real estate development


< RMB 2 billion

Property management

< 1,000

< RMB 50 million

Rental and commercial service

< 300

< RMB 120 million


< 300

(Medium: 100-300

Small: 10-100

Micro: <10)


Although SMEs play an important role in China, financing difficulties have long been a bottleneck restricting the development of SMEs.  Most SMEs' application for financing in China gets rejected due to bad credit score or lack of credit history. According to the survey, more than 50% of SMEs in China do not have proper financial management in place. Many Chinese SMEs lack financial statements and sustainable business operation records that can be recognized by the financial audit departments.  More than 60% of SMEs' credit scores are below 3B.  However, 80% of new bank loans are concentrated in large enterprises with credit scores of 3A and 2A.  

SMEs are more prominent in the manufacturing sector, as well as the wholesale and retail trade sectors. These sectors are engaged in business activities that have become subject to new tariffs as part of the US-China trade war, which is leading to higher credit risks. Access to working capital loans can be even more restrictive for these firms, given higher credit risks and low appetite on behalf of the banks.

When China's economy is slowing, SME loan growth has been continuously decelerated, with just 20% of bank loans going to SMEs in 2018, down from 30% in 2017. The situation will only grow worse this year as the government has initiated a nationwide deleveraging campaign that has made financing scarcer across the economy, with smaller companies hit particularly hard.

Starting from the first half of 2018, as one of dozens of decisions made at the Central Economic Work Conference, the Chinese policymakers decided to reduce alternative financing (“shadow banking”), which used to lie at the edges of the existing regulatory framework.  China's shadow banking system has experienced rapid growth since the global financial crisis in 2008, and has constituted an important source of financing for SMEs. It's an industry of loosely regulated, high-yield lending outside the formal banking sector. However, this industry has cooled for the first time in a decade. Outstanding loans in the shadow banking sector fell to RMB 61.3 tn ($9.1tn) in 2018, down about 6.5% from the end of 2017 and at the lowest level since 2016.  Following the aggressive national campaign against Shadow banking, the cost of borrowing should be much higher for private companies and more SMEs defaults are on the rise.

The good news is that, since early 2019, the Chinese banking regulators have introduced a series of measures for renewing micro and small business loans to shorten the financing chain and reduce financing costs. For companies that have run into temporary operational difficulties but still have enormous potential for development, banks shall help them get through the tough times by renewing their loans according to the loan renewal policy. However, banks are forbidden from covering or delaying risk exposure associated with lending to 'zombie firms', which cannot repay loans, in the name of loan renewal.  

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Jamsine Song

Head of risk analysis @ tiidan

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