Financial challenges faced by the SME in China

By Priya Chetty on January 5, 2012

Whilst studying the lending and the changing structure of the banking industry, Strahan and Weston (1998) find that SMEs get reduced of financing in the case large size banks forms merger or acquisition, whereas in the case forming merger or acquisition by small scale banks financing increases for the SMEs. They throw light on an occurrence which concerns to the fact that during the establishment of small scale banks merge diversification improved anti-risk capability of the banks subsequent to the merged and in this way they may well offer more financing to SMEs. However, with the added opening out of the banks’ size, they lean to financing to large size firms, consequently, the proportion of financing to SMEs tend to come down. On the other hand, authors have revealed based the findings of their study that big establishments are found to finance to bigger, grown-up SMEs with strapping financial proportions, and small establishments are revealed to be reliant more on soft information and financing to SMEs with which they have strapping associations relationships (Bergen et al, 2005). Given that SMEs play an ever more vital role, authors increasingly have started to examine financing to SMEs in the contexts of both developed and developing countries.

Financial accessibility

Cross-country studies conducted so far demonstrate that SMEs undeniably face large financing constrictions that obstruct the survival and growth of such firms. In this context, one of the most notable revelations is that asymmetric information stuck between the lender and the borrower of SMEs might impede financial institutions keenness to offer finance. This eventually would slow down the SME performance in terms of various growth indicators. In this context, Coluzzi, Ferrando and Martinez-Carrasca (2008) cited in Balling et al (2009), study the financing obstructions of five euro area countries (Germany, Spain, France, Italy and Portugal) making use of survey data gathered from SMEs made available by the World Bank. The findings of their study reveal that growing SMEs clearly grow up quicker than grown-up SMEs, however when it comes to financing challenge or accessibility of financing, the growing up SMEs have comparatively more financing constraints than the grown up. More specifically, as they reveal SMES the manufacturing and construction sectors are more probable to be hampered by non or restricted accessibility of which might be due to the far above the ground capital requirement for operation in these sectors.

On the other end, Huyghebaert (2008) have studied the facet of the result of financing control on SMEs conduct , and based on the findings of their study they contend that high control forms spurs for SMEs to take full advantage of immediate income for reducing the risk of unhelpful financing decisions by financing organizations and a likely resultant liquidation of the SMEs, seeing as their survival and growth is a decisive for those usually holding a mainly investment portfolio in undiversified form and benefit from large private benefits from control.

Banking challenges

In his study of financing in SME in developing or emerging countries, Volz (2008) finds that best possible growth environment for SMEs are for the most part imperative in developing countries. However, he draws our attention towards the fact that SMEs in developing countries keep on to be gravely financially controlled, where a big number of firms in SME sector yet have no bank financing , and further they carry on to have tribulations of access to financing. On the other hand, the strained well-built supremacy of in-house financing for SMEs obstructs survival and growth. Astonishingly as he finds, existing banking or financial system reform could even have worsened access to finance for SME and notably out of country banks or financial institutions entry and running in the country tend to carry a remove of know-how and augment the competence of a changeover financial sector. Nevertheless, truly the movements of such out of country banks appears to profit principally large size firms, with SME being more or less left out. In addition, elevated focus on the banking sector is unquestionably tend to perk up financing accessibility for SMEs in developing countries that require urgent policy issue.

Lehner and Schnitzer (2008) draw our attention towards the effect of foreign banks’ operation in the host country banking sector, and based on their findings they conclude that the domestic banks get the opportunity to be trained to run more proficiently together with foreign banks. In this framework, Dell’Ariccia and Marquez (2004) have extended a model which establishes that financing is more reachable to firms with convincing qualitative information in the case of more and more concentration of foreign banks. This model further establishes that foreign banks’ operation in a country leads to increased sum of financing offered or made accessible to SMEs in comparison to domestic banks.

As far as SMEs in China are concerned, they are yet still facing the hurdles in relation to outside financing. Walter (2005) finds that SMEs in China get just 12 percent of their running capital from bank financing and this critical situation of financing SMEs in China can be attributed to various reasons principally unproductive financial structure, banking system deficiency etc.


  • Strahan, Philip, E., and Weston, J. P., 1998. Small business lending and the changing structure of the banking industry. Journal of Banking and Finance, 1998, 22, 821-845.
  • Bergen A. N., et al., 2005. Does function follow organizational form? Evidence from   the lending practices of large and small banks. Journal of Financial Economics, 76: 237-269.
  • Balling, M., Bernet, B. and Gnan, E., 2009. Financing SMEs in Europe. [online]. Available at <> Accessed on December 02, 2011.
  • Lehner, M., and Schnitzer, M., 2008. Entry of foreign banks and their impact on host countries. Journal of Comparative Economics, 36, 430-452.
  • Dell’Ariccia, G. and Marquez, R., 2004. Information and bank credit allocation. Journal of Financial Economics, 72, 185-214.
  • Walter, G. F., 2005. Small and medium enterprises financing in China. [online]. Available at <> Accessed on December 02, 2011.