Hey Buddy Can You Spare a Yuan, Part II -- The Sorry State of Lending in China

A few weeks ago, I did a post called "Hey Buddy, Can you Spare a Yuan? The Sorry State of SME and Consumer Lending in China" in which I blogged on how private Chinese companies usually must resort to pawn shops or the black market to secure a loan.  I mentioned how the banks lend just to large government owned companies, and how they do so at the same rate for all.

Seems the International Monetary Fund (IMF) is horrified by this state of affairs as well, and in its just released report, it notes that China's banks are still little more than a government funding arm.  Paul Kedrosky's Infectious Greed Blog (one of the best of the thousands of technology/VC blogs on the web), in a post entitled, "Need a Loan, Go to China," has this to say about China's banks and the IMF report:

There is a truly harrowing new working paper out on China's banks from the IMF. The author investigates recent reforms in China's banking system, and comes to a disturbing conclusion:

"We examine lending growth, credit pricing, and regional patterns in lending from 1997 through 2004 to look for evidence of changing behavior of the large state-owned commercial banks (SCBs). We find that the SCBs have slowed down credit expansion, but that the pricing of credit risk remains undifferentiated and banks do not appear to take enterprise profitability into account when making lending decisions. [Emphasis mine]"

Did you get that? Despite being less profligate about spinning out loans, Chinese banks still dole out money without paying overly much attention to inconsequentials like profitability, creditworthiness, etc. What fun!

Countless well run private enterprises in China are desperate for capital and the need for equity/VC funding in China is huge since that is one of the few ways private Chinese companies can secure capital.