China expands small enterprise stimulus applications

A man wearing a face mask rides a bicycle as a novel coronavirus outbreak struck the country on February 12, 2020 in Beijing, China.

Carlos Garcia | Reuters

BEIJING – China is expanding support measures for the country’s smallest businesses, a signal that full economic recovery from the shock of the coronavirus pandemic is still fraught with uncertainties.

The central government announced a series of measures to support the economy during the height of the domestic outbreak, particularly loans for smaller, privately owned businesses. These companies contribute most of the growth and employment in China, but often find it more difficult than state-owned companies to obtain loans from banks, which are also primarily state-owned.

China’s top executive, the State Council, announced late Tuesday that small and small businesses could postpone loan repayment as needed after the first quarter of next year. According to a government statement, banks that provide government aid to these small businesses for 40% of those loans will now be able to maintain that support beyond the end of this year.

“Right now the economy is gradually returning to normal, but more support is still needed as manufacturing and operating small and small businesses face unique challenges,” a CNBC translation of the Chinese text reads. Authorities found that previous guidelines have helped more than 3.1 million small businesses.

The fact that the government must set these guidelines shows that there are still challenges in the economy, said Nicholas Zhu, vice president and senior credit officer at Moody’s Investor Service.

After Covid-19 surfaced in the Chinese city of Wuhan late last year, authorities closed more than half the country in February to control the outbreak. GDP declined 6.8% in the first quarter before returning to growth in the second quarter.

China’s gross domestic product grew by 0.7% in the first three quarters of the year. This made the country the only major economy to expand this year after the pandemic.

The official, though highly doubted, urban unemployment rate fell to 5.2% in November, which is the same as in the same period last year.

China has not seen major bankruptcies this year and most of the people are still employed, said Liu Xiangdong, deputy director of the economic research division at the Beijing-based China Center for International Economic Exchanges.

“But there are still uncertainties for small, medium and small businesses. If the economy turns, they can’t keep up,” Liu said, according to a CNBC translation of his Mandarin remarks.

He noted that the smallest companies are in the service industry, which has been recovering from the pandemic longer.

Sporadic cases in various cities since the domestic outbreak broke out in March have resulted in mass tests or occasional renewals of restrictions on business, primarily affecting consumers and services. Many people spend less given the uncertainty about income. At the end of November retail sales were down 4.8% year-on-year.

More risks for Chinese banks

According to analysts, the question is when authorities should appropriately lift economic support, especially given the ongoing spread of the coronavirus in the US, UK and Europe.

Last week, at an annual meeting to set development priorities for the coming year, Chinese leaders were generally optimistic, but noted that the economic recovery was not fully intact and support would not suddenly change.

Government policies this year have helped, albeit not dramatically, said Zhu. The vast majority of small businesses failed to take advantage of the deferred repayment policy, he said, citing Moody’s conversations with banks.

Because of this increased stake in smaller, typically riskier companies, Moody’s has negative outlook for Chinese banks given the risk of default and the high number of new bad or bad loans.