Author: Liu Guohong, Assistant President, Director of Department of Financial Development and State-owned Assets and State-owned Enterprise Research.
As the Omicron outbreaks slowed down production across the globe, funding options have become limited but also urgently needed for private companies. Over the last two years, financial relief policies had been delivered rapidly to those pandemic-hit cities in China. In this regard, the accumulated experiences in policy implementation could serve as the role to stabilise and stimulate the market to greater effect.
What are the Problems facing China's post-Covid financial relief policies?
Policies that are packed with low-interest rate loans in order to reach more beneficiaries will lead to increased financial risk as the return on such loans cannot cover the cost of capital. Resultantly, financial institutions will become reluctant to supply the market with more capital, thereby compromising the efficiency of the financial relief policies.
The suppressed funding needs of certain companies rise to the forefront due to the surge of overeager bankers and the sudden drop in cost of funds. Thus, these companies sign on to financing programmes without a clear business plan. The compulsive investment into rapid expansion only leads to short-lived prosperity while losses and financial risks will increase with time goes on.
At the same time, customised policies for a green economy alongside science and technology innovation, finance are not widely known among MSMEs, which as such will not be able to take advantage of the prescribed financial concessions or privileges.
How to make the financial relief policies more effective?
Financial institutions, serving as middlemen between the capital supplier and receiver, bear the responsibility of not only providing necessary funds for the receivers on the demand side but also ensuring the safety and return of the capital. If fulfilled, people will then entrust financial institutions with their savings, allowing capital to be utilised and circulated. In other words, the sustainability and value addition capability of financial products are crucial for attracting more capital to empower the real economy. Therefore, financial institutions need to vet companies and supervise the relevant funds to suitably perform their role in capital allocation and risk management.
In the current context, financial relief policies should enable financial institutions to freely price their services within the policy’s selected range. In addition, more freedom in decision-making should be given, ensuring that limited financial resources and services are allocated to the companies with higher potential.
Moreover, the customized policies for a green economy alongside science and technology innovation finance need to be further promoted. The private sector, especially the MSMEs, need to prepare and make full use of these policies which allow financial institutions to have a higher tolerance for risk in the targeted sectors. This will be supportive to the fulfilment of stable and sustainable development.
Lastly, competition and cooperation among financial institutions should be encouraged. This can be promoted by additional service licenses being provisioned to the market by financial policies. With more financial institutions entering the market, the quality and efficacy of financial services will be able to improve further whilst costs diminish. In the meantime, the diversified financial service providers and the increased competition and cooperation within the industry will facilitate sustainable economic development and promote high-quality development.