Credit Financing Predicament Of SMEs In China And Possible Coping Strategies

As an important component of China's economy, small and medium enterprises (SMEs) have not only contributed to promoting the country's economic growth, increasing government revenue and providing job opportunities, but also served as major sources of economic vitality and the industrial creativity. However, accounting for over 99% of the total number of enterprises, SMEs only consume less than 20% of the country's financial resources, which is disproportional to the contribution they made to China's economical and social development. Financial shortage has been the bottleneck of the development of SMEs and has severely constrained their expansion and growth.As China's capital market is immature and the development of a multi-level capital market lags behind, most SMEs cannot acquire funds through equity or debt markets. Further, SMEs have difficulty in accessing direct financing channels because of systematic or institutional plagues like the lacking of a functional venture capital mechanism or a property rights trading market. Given that internal financing sources are too limited to meet the demand and the threshold of equity financing is too high, SMEs can only rely on credit financing from commercial banks. However, due to the information asymmetry in the credit finance market, factors like SMEs'low credit will and insufficient credit become major reasons constraining the scale of SME financing.Currently, under the pressure of the international financial crisis, a considerable number of SMEs are suffering from profit decreasing, deteriorating market and cash shortage. The Chinese government has paid serious attention to SME financing and prescribed a series of policies to help SMEs cope with the difficult situation. However, little has been achieved because of a number of reasons. How to ease the difficulty of SMEs'credit financing and overcome their financial bottleneck has thus become a particular real and pressing question.Based on the combination of existing research, available public statistical data and materials obtained from the fieldwork, this paper attempts to study the current situation of SMEs'financing problem and the difficulty SMEs have. By focusing on credit financing, the study examines the information asymmetry between banks and SMEs in the credit market. With the guidance of economics theories, ranging from moral hazard and adverse selection of information economics, to transaction costs and principle-agent model of institutional economics, the study points out that the credit market failure caused by information asymmetry is the root of SMEs'credit financing difficulty, thus adding to existing studies explaining the causes of SMEs' financing predicament. In this study, firsthand data have been collected from the field with a survey questionnaire. Regression models are run and based on which quantitative analysis is carried out. The empirical findings on specific factors constraining SMEs'credit financing strengthen the conclusions of theoretical analysis, and provide the foundation for possible solutions of the problem. Finally, based on the analysis, the paper explores how banks, enterprises, as the Government can joint the efforts to enhance the overall capacity and will of SMEs to credit financing so that to ease the financing difficulty from the root and to promote the development of SMEs.