Guangdong "Gets" SMEs

Sunday's SCMP reports that Guangdong Province has established a firm to guarantee the loans of small and medium enterprises. The firm will initially be funded with 2 billion RMB (about $290 million).

Though small and medium enterprises (SMEs) form the backbone of China's private sector, they have had a notoriously difficult time obtaining bank loans. Entrepreneurs have had to resort to loans from family members or underground banks that charge exorbitant levels of interest.

China's state-owned banks have typically shied away from lending to these smaller firms because it is simply much easier to lend to other big SOEs. Everyone knows that the state will eventually come to the rescue of SOEs; not so with private firms.

Why is this happening in Guangdong and not elsewhere? I will venture a few guesses. First of all, the central government and Shanghai have traditionally focused their energies on big firms that have the potential to become "national champions". The smaller firms, while certainly providing an important boost to the economy, simply aren't as interesting to politicians trying to move up the ladder. (In all fairness, the State Council has recently spoken in support of SMEs, so maybe this will also result in concrete action at some point.)

Second, Guangdong has for years been a preferred location for small factories, both Chinese and foreign-owned, turning out everything from iPods to shoes to lawn furniture. Perhaps it is Guangdong's proximity to Hong Kong that has made it an ideal location for exporters. Perhaps it is a local government that values SMEs' contribution to the economy.

Whatever it is, these nameless, faceless firms have become an important part of the Guangdong economy over the years, but they have recently fallen on hard times. Official statistics indicate that 2,452 manufacturing companies closed in Guangdong in 2008. I've seen even bigger numbers than this, but they do not come from official sources.

Guangdong Province also intends to support any cities in the province that implement programs to support their local SMEs. Another 1 billion RMB will be made available for this purpose.

Guangdong clearly understands how to leverage local funds to stimulate the economy. The 2 billion RMB that will be used to fund the company that will guarantee SME loans can be used to support many times that amount in loans (because not all SMEs supported can be expected to default on their loans).

Small business loan guarantees provide a great way to get more bang for the buck, or the yuan. Perhaps other governments (not just in China) could take a lesson from Guangdong.