The Modern Credit Rationing Theory And The Financing Of SMEs In China

SMEs have been the main pushing power in the economic growth of our country, but in the course of their development they have been faced serious financing restraints. By reviewing the theory of credit rationing, this paper explores the reasons of the financing difficulties for SMEs and the ways how to solve the problems. The whole paper is divided into six parts.The first part is the introduction of the paper. It points out the significance of this subject, and briefly introduces the structure of this paper.The second part presents the importance of SMEs in our national economy and the present financing situation of SMEs. Since the reform and opening, the SMEs in our country have developed rapidly. In 2005, the numbers of SMEs have accounted 99%, the assets 61%, the sales 62%, and even the profits have accounted 54%. As for the aspect of the labor productivity, the SMEs could match the large-scaled SOEs in strength. The SMEs have played an important role in the development of the national economy. Therefore, we should pay much attention to the development of the SMEs. By developing the SMEs, we could increase the viability of the market economy and improve the system of the market economy. Despite of the important roles of the SMEs in the national economy, nowadays the financing environment of the SMEs is not optimistic. The developing funds of the SMEs mainly come from the internal financing. However, the accumulation of the internal financing comes slowly and it can not catch up with the rapid development of the SMEs. It is necessary to accumulate funds through the external financing. As for the external financing, the way for direct financing of the capital market has been blocked, and the financing can only come from bank loans. However, under today's financial system, the financial institutions do not provide enough financing support for the SMEs. It is difficult for SMEs to obtain the funds of development, especially the long-term funds of development, from the financial institutions. SMEs are involved in the difficult situations of the indirect financing from the banks. From the above statements, the exploring problem of the paper is presented: why the SMEs are faced such serious financing difficulties even though they play such an important part in the national economy?The third part introduces the theory of credit rationing of Stiglitz and Andrew Weiss. Through the introduction of this part, about the financing difficulties of SMEs, we have found source in theory. Under a series of hypothesis, this paper, from two ways—rate and collateral, proves that there exists credit rationing phenomenon in a loan market. Stiglitz and Andrew Weiss hold the opinion that for rate and collateral there are the adverse-selection effect and the moral hazard effect. The adverse-selection effect of rate and collateral often occurs in the application of loans. Some high risk investor would like to afford high interest rates or more collateral in order to obtain loans. However, if banks accept the loan applications of this high risk investor, the risk of the loan would increase, and the quality of the loan would be worse. The rate and collateral also have the moral hazard effect which happens after borrowers obtain the loans. At this time, if the borrowers have a set of projects to undertake, they would like to spend loans on the high risk projects. Because if the project is successful, they will obtain more returns; if the project fails, he will only undertake limited liabilities. Due to the asymmetric information, the bank does not know about the borrowers perfectly. Therefore, the bank decides upon the optimal magnitude of loan and rates only according to his own expected return. Neither rate nor collateral is the effective means of sorting. They can not distinguish the safe borrowers from the risky borrowers. On the aspect of the equilibrium interest rate, the bank can not identify the qualities of borrowers, so it only allocates the optimal magnitude of loan among the borrowers. At the same time, some'good'borrowers can not obtain loans, but some'bad'borrowers can obtain loans. Therefore, a loan market of asymmetric information is lack of efficiency. The theory of credit rationing of Stiglitz and Andrew Weiss breaks through the government regulation of the maximum rate in the traditional economy. They think credit rationing is endogenous in the economy and it is a long-term phenomenon. However, some hypotheses of the theory are not consonant with the realities and this situation has influenced the effectiveness of the conclusion.The fourth part presents how the later economists pursue the ways to solve the credit rationing problem, based on the theory of credit rationing of Stiglitz and Andrew Weiss. This part mainly introduces the academical views of Bester and Martinelli on the credit rationing. In their opinion, despite of asymmetric information, the banks can distinguish the safe borrowers from the risky borrowers by regulating the economic mechanism in order to solve the credit rationing problem and improve the efficiency of the loan market. Bester holds the opinion that investors with a low probability of bankruptcy are more inclined to accept an increase in collateral requirements for a certain reduction in the rate of interest than those with a high probability of failure. The banks can decide upon the collateral of their credit and the rate of interest simultaneously to screen investor's riskiness. Therefore, it becomes possible to use different contracts as a self-selection mechanism and there will not be credit rationing on the equilibrium. Martinelli relates firm age with firm size and access to credit markets. The firm reputation is changing dynamically and it is renewing endlessly. Both the magnitude and rate of credit are the functions of the reputation. Credit markets impose limits on the size of the new firms. Thus, newer firms pay higher interest rates and are more credit constrained than older firms. However, as the increasing of the reputation, the loan rates become decreasing and the borrowing constraints will disappear.The fifth part of the paper summarizes the policy meaning of the retrospective theories. The credit rationing is the endogenous economic phenomenon. The financial gap of the credit rationing can not be eliminated simply by adjusting the loan rates. It is necessary to take different kinds of measure to solve the problems caused by asymmetric information between the banks and SMEs.The sixth part provides the policy advice towards the paper. Firstly, because of the importance of reputation and symmetric information, we should establish the credit system of the whole society as soon as possible in order to solve the problems caused by asymmetric information between the banks and the firms. Secondly, because the collateral plays a role in the credit markets and the SMEs in our country only have low collateral power, it is suitable for us to develop credit guarantee system of the SMEs. Thirdly, since the serious financial gap problems caused by the asymmetric information between the state-owned banks and the SMEs, we should try to establish the financing channels in order to know the information of the SMEs. We should also accelerate the establishment of the medium-small financial institutions and the development of the nongovernmental finance.