Banks and SMEs need to forge a closer relationship to boost growth

Economic data points to a rough transition as the Chinese economy modernizes. Turmoil in the stock market and poorer-than-expected Purchasing Managers Index figures illustrate the challenges ahead.

But despite monetary loosening policies, optimism is in short supply. Clearly, further cuts in interest rates and the reserve requirement ratio, or RRR, the amount banks must hold in reserve, have been used to stimulate the economy.

In particular, the government appears to be targeting bank lending to China's army of small and medium-sized enterprises, or SMEs, and has even set up a 60 billion yuan ($9.4 billion) national fund. Still, two questions have to be asked: Are these bank-lending policies sufficient? And are China's SMEs equipped to take advantage of these new funding arrangements?

Sadly, China's larger banks are still far too conservative with their cozy relationships with the country's corporate giants. That is one of the reasons why development of the country's SME engines of economic growth remains weak.

As a result, government policy and initiatives are focusing on the relationship between China's biggest banks and SMEs. Of course, the People's Bank of China's move to encourage lending represents a step in the right direction, but much more is needed.

Despite rapid and ongoing modernization, SMEs remain relatively inexperienced, especially when it comes to international markets. It is, therefore, just as important for China's banks to play an active role in any investment and product development as it is to help them with funding.

So, what should this "active role" entail? Most important of all, it must be a long-term partnership and not simply a short-, or even medium-term project. In much the same way as supply chain integration has become a key feature of the international business environment, banks and SMEs need to work closely together.

This could even involve having a representative from the bank, which has provided investment, on the board of directors at the corporate client. If lending is to prove effective over the long term, it is vital that banks play a key role in the decision-making at SMEs, and the management and monitoring process.

Any government incentives, therefore, that encourage the formation and development of such a partnership have to be welcomed. This arrangement would certainly lead to a sizable reduction in bad loans. Cementing a lasting relationship could also involve other forms of financing and not just basic lending.

For example, the country's banks could take a stake in their corporate clients by buying shares in the companies. This would forge a relationship between both parties and help SMEs, especially in the high-tech industries, generate long-time economic growth.

The author is a visiting professor at the University of International Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University's School of Business. The views do not necessarily reflect those of China Daily.