As reforms progress and the Chinese economy becomes increasingly open, the role of small and medium-sized enterprises-----township and village enterprises in the country is growing. They produce 30% of gross industrial output, despite its growing importance, at the end of 2000, the TVEs accounted for only 8 percent of bank lending , and only 3 percent of the companies listed on the Shanghai and Shenzhen stock exchanges were TVEs firms. The discrepancy between the dynamism of the TVEs and its limited use of intermediated financing suggests that if TVEs want to sustain its current rate of growth ,they must to increase its access to financing.1.0 Chinese TVEs Financing patternsGeneral ...view middle of the document...
2.0 Factors affecting access to financingThe difficulty Chinese TVEs firms face in obtaining financing is due partly to the nature of Chinese TVEs and partly to factors within the financial system .2.1 Bank lack incentives lending to TVEs.NPLs(non-performing loans) are recognized as one of the most serious balance-sheet problems facing Chinese banks in recent years, yet the exact figure of total NPLs in China's banking sector is still unknown.however, banks do not consider a bad loan to a state-owned enterprise to be as serious as a bad loan to a TVE . Although government has reduced significantly interference in bank lending. However, local governments continue to implicitly encourage bank lending to state-owned enterprises. At present ,more than 70% loans flow into stated-owned firms, whick accounts for less than 30% of the added value of industrial output. Furthermore, when a state-owned borrower fails to service a loan ,the government will almost certainly act as "the last straw". Most of TVEs borrowers do not benefit from the same kind of act, until this asymmetry in the risks banks face in making loans to firms with different types of ownership is eliminated ,banks will discriminate against TVEs firms.banks therefore need added incentives to lend to chinese TVEs. One such incentive could be higher returns, but most banks in china are state owned and face limited competition , four major banks account for 70% total assets and loans and over 80% of its total assets. with the result that the profit incentive is weak. Furthermore, financial sector reforms focused on reducing the accumulation of nonperforming loans in the system are making banks more averse to risk. Banks concentrate on avoiding losses and show little interest in sharing the rewards of projects that may be riskier but have higher expected returns. The central bank requires all banks to implement a policy known as 'responsibility to individuals,' which makes credit officers personally responsible for loans, thereby discouraging them from making loans for TVEs sector projects.In addition ,the interest rates in china are capped ,there are controls on interest rates and transaction fees, although the government has been gradually relaxing some of them . On loans to small and medium-sized enterprises,they are allowed to be 30 percent higher than prescribed rates, and rural credit cooperatives are allowed to charge interest rates up to 50 percent higher. Banks are taking advantage of this more flexible interest rate regime, but interest rates need to be liberalized further to encourage more lending to chinese TVEs. The government is expected to relax restrictions even further in preparation for china's entry into the would trade organization(WTO).for the time being ,banks and credit unions have found creative ways to circumvent interest rate controls, such as requiring compensating balances and charging false late payment fees. As a result , state banks charge effective interest ra...