• Alexander Liu-Middleton

China aims to improve access to funds by cutting private companies financing costs

The Chinese government has revealed that it will take measures to cut private companies financing costs in an effort to improve their ability to issue bonds and raise funds by other methods.

In recent months the Chinese government revealed a series of economic steps designed to support small to medium sized private firms (non-state backed) to stabilise employment and economic growth.

The Chinese economic cabinet declared "the private economy plays an irreplaceable role in stabilising growth, promoting innovation, increasing employment, and improving people's livelihood,"

Current policy measures have had some positive effects; however, some smaller private companies still struggle to get adequate funding and financing costs are high.

The Chinese state will redouble its efforts to advance monetary transmission mechanisms to make banks more willing to lend to private companies as smaller private companies are considered a riskier option that state backed companies.

The administration will also inspire financial organisations to increase investment in debt issued by private companies and improve the effectiveness of the central bank's targeted reserve requirement ratio (RRR) cuts for banks to help private corporations.

To free up more funds for lending, particularly to vulnerable smaller firms, the People's Bank of China has cut RRR - the amount that banks need to set aside as reserves - five times over the past year.

Further reserve reductions are expected in coming quarters, alongside tax cuts and increased infrastructure spending to support a slowing economy pinched by a trade war with the United States.

Supervisors will speed up consents for private companies' initial public offerings and refinancing activities, and allow such firms to issue convertible bonds.

The breakdown of a multifaceted web of debt guarantees involving several private companies highlights risks in the financial system and opens up a potentially unsafe front for an economy in the grip of its slowest development in nearly 30 years.

China Consulting Solutions director David McMullan comments “increased funds for small to middle sized companies allows for the kind of expansion (overseas trading) that is necessary for them to evolve to the next level. This is a smart move by the Chinese government.

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