| China's small and medium-sized enterprises (SMEs), which exceed 29 million in 2001, are playing an important role in economy gradually. But, they only accounted for low proportion of bank lending, and few small firms listed on the Shanghai and Shenzhen stock exchanges. Private equity markets in China are at an embryonic stage of development. The discrepancy between the dynamism of SMEs and their limited use of intermediate financing suggests that they may not be able to sustain their current rate of growth unless they can increase their access to financing.Based on a lot of literatures, the paper makes great effort in study on the interactions between financial institutions and small firms in regional economy. The difficulty SMEs facing in obtaining financing is due partly to factors within the financial system and partly to the nature of China's small enterprises.On the financing demand side, SMEs relied heavily on self-financing for both start-up. Many of enterprises' initial capital came from the principal owners, the start-up teams, and their families. Among external funding sources, informal channels, credit unions, and commercial banks were about equally represented. Outside equity played an insignificant role. The paper shows internal sources tend to become less important as an enterprise grows larger. External sources for the smallest firms are mainly informal channels, but their share tends to decrease as firms grow bigger, while the share of commercial bank loans increases with firm size. The inability to meet collateral requirements is the most frequent reason for not being able to obtain a bank loan. In practice, real estate assets appear to be the most common-in some cases, the only-kind of collateral accepted. The legacy of public and collective ownership of land, many private firms do not have land-use rights or buildings that can be used as collateral. In addition, establishing the value of a firm's assets so they can be used as collateral is costly. On average, Chinese banks tend to play a relatively small role in financing small firms. At most 50 percent of firms in the area of case study had secured loans. Macroeconomic and survey data suggest that the impressive growth of SMEs in China over the last decade has been financed overwhelmingly from internal sources. International evidence suggests that this is not sustainable. As firms mature and grow larger, their need for external finance will grow.On financing supply side, there is credit rationing of the lender due to asymmetric information, adverse selection and moral hazard. Generally speaking, banks tend to provide more support for larger and relatively successful firms, especially large and nationwide banks. But local small banks tend naturally to focus on underserved market niches, especially younger and smaller firms, which constitute the bulk of SMEs today. The paper shows local small banks are a growing important external source of SMEs' financing, because it is easier to collect the information of local small firms than large banks do. For instance, local small banks are available to build the belief relationship with local small enterprises through the relationship lending. Unlike other most of countries, China's financial sector development does not follow the common order, which develop from small bank to large bank. Twenty years ago, there are only four state-owned large commercial banks in China, which distribute nationwidely. With the result that the large banks face limited competition, and the profit incentive is weak. Indeed, the central bank requires all banks to implement a policy known as "responsibility to individuals," thereby discouraging them from making loans for SMEs projects. In addition, nearly all state-owned commercial banks are decreasing their branch agencies in the counties, remote cities and towns, where formal financial services appear vacuum and SMEs lack of access to finance to be a serious constraint.The paper try to study the development of Rural Credit Cooperative (RCC) in...
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