The rudimentary state of China’s accounting system and asymmetric credit information environment has deterred many banks from lending to SMEs.  Some local banks are experimenting with innovative methods to overcome information asymmetries:  By working with local governmental agencies the banks compare utility usage, tax payments, export and import volume and cash flow information.  In cases of SMEs engaged in import and export, it is also possible for banks to appeal to the customs authorities for information sharing.  Thus the emphasis is on non-financial data.  Nevertheless, before a SME obtains a loan, the SME must register with its affiliated industry association, which is responsible for auditing the SME’s business plans based on industry knowledge.  Loan performance is shared within the peer group of the industry association in order to force compliance and to avoid losses.  China’s SMEs contribute over 60% of GDP, employ about 75% of the labor force and account for nearly 99% of the total number of enterprises. (Source: The Asian Banker)

BIIA Newsletter March – 2006 Issue