Small and medium-sized chemical companies have emerged as a crucial driver of China's economic growth. However, they continue to face significant challenges, particularly in accessing financing. This issue has become a major obstacle to their sustainable development. Why is it so difficult for these enterprises to secure funding?
One key reason lies in the lack of standardized financial management and operational practices. Many small and medium-sized chemical companies operate in informal structures, such as family-run or collective models. Their decision-making processes are often opaque, with limited transparency and weak internal controls. This lack of structure makes it hard for banks to assess their creditworthiness, leading to reluctance in providing loans.
The establishment of the SME board on the Shenzhen Stock Exchange in 2004 aimed to provide a new avenue for small businesses to raise capital. While this initiative has helped some high-tech SMEs access funds, it remains limited in scope. Most Chinese SMEs are labor-intensive and not well-suited for stock market financing. These firms typically lack the scale, visibility, and financial stability required to attract investors, meaning the SME board offers only partial relief for the broader sector.
State-owned banks also play a critical role in SME financing, but their willingness to lend is constrained by information asymmetry and uncertainty. Many small chemical companies are still in early stages of development, with limited financial records and low transparency. They often hesitate to provide the detailed accounting information that banks require, further lowering their credit ratings. As a result, banks tend to impose strict lending conditions, making it difficult for these companies to meet the requirements.
Moreover, the SME credit guarantee system in China is still underdeveloped. Although the system was introduced in 1998 and has provided billions in guarantees, it remains heavily reliant on government support, with minimal private sector involvement. Government-backed guarantee agencies prioritize social goals over profitability, which can lead to excessive risk-taking. When defaults occur, these agencies may struggle to cover losses, causing them to become hesitant in supporting SMEs in the future. This creates a cycle of mistrust between banks and small chemical companies, further limiting access to capital.
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