Why do I mention this? It is fairly easy to register a company and now the cost is pretty low, but it
is quite difficult for the company to raise funds. The major financing source of start-ups is
relatives as borrowing money from banks or the capital market is very difficult. Moreover, there is
a strict selection process for bank loans. At present, there are a total of 1.35 million SMBs in
China that have secured loans, 11.03 million self-employed businesses with operating loans, and
4.11 million SMB owners with operating loans. These are all among the 100 million companies
mentioned just now. The credit record of companies with loans can be looked up in the credit
reporting system of the PBC. SMBs and self-employed businesses are at a relatively
disadvantaged position. In view of their loan conditions, we should say that the financial support
for them is quite strong.
The average lifespan of China’s SMBs is three years. Some achieve success and become big
companies while others disappear soon. The average lifespan of SMBs in the US is eight years,
and that in Japan is twelve years. When can China’s SMBs get bank loans for the first time? On
average, four years and four months after their establishment — that is to say, they have to
survive the death phase before getting loans. If they can get their first loans, they have a 75% +
chance to get the second loans. This is the law of finance. What finance does is to guard against
risks by examining whether you have collaterals or not and how big the risk of granting loans to
you is. So we can see such a distribution structure.
Now let us go back to the three numbers I mentioned just now. Why do self-employed
businesses and SMB owners have more loans than SMBs? It is determined by risks. The
registered companies now are companies of limited liability that can go bankrupt. When SMBs
apply for loans, banks need to check whether they have collaterals. Otherwise, banks cannot get
back the principal once such enterprises go broken. This is the reason why, among so many
SMBs in China, only 1.35 million SMBs can secure bank loans as legal persons. Then why are
there so many self-employed businesses that have been granted operating loans? This is
because although they are companies as well, they apply for bank loans in the name of
individuals. If the money is not paid back, their houses and assets bear joint liability, which in
nature is unlimited liability. The situation for SMB owners is similar, as they ask for loans in their
own names and may have used their houses as collaterals. You can learn about the implications
of preventing financial risks. From the perspective of macro economy, as long as a newly
established company can create jobs and produce products, it is good to the society — just as
the saying goes, it doesn’t matter if a cat is black or white so long as it catches mice. No matter
the loans are SMB loans, self-employed business loans or SME owner loans, enterprises can
increase employment and boost economic growth as long as the they get loans. Therefore, what
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I care about are the loans of this 16 million plus companies, and we should pay attention to the
perspective of inclusive finance in this sense.
With respect to changes in the external environment, the real economy has been impacted by
some external shocks. These shocks might be trade frictions or other market turbulances,
which
have indeed exerted some impacts. In this process, expectation guidance should be enhanced.
And we should particularly be alert that risks can transmit across different markets, like the risk
transmission among the bond market, the foreign exchange market and the stock market. In the
meantime, the monetary policy and macro-prudential policy should be utilized in maintaining
market stability.
The monetary policy pays special attention to market liquidity, and one indicator is DR007. This
year, the terminal DR007 dropped from 2.8% in the first half of the year to 2.6%, and China’s 10-
year treasury bond yield also fell from around 4% at the beginning of this year to around 3.3% at
present. This is the effect of the prudent and neutral monetary policy
, reflecting its support for the
real economy. It is safe to say that the financing and interest rate conditions are more relaxed,
which can partly ease the problem of enterprises being unable to access loans or having to pay
high interest to secure loans.
Looking at aggregate indicators, we just released the growth rates of the M2 money supply and
aggregate financing. Currently, M2 grows at a rate of 8%, and aggregate financing around 10%,
matching the growth rate of the real economy. The current macro leverage ratio stands at a
rather stable level. Over the past 10 years, or 20 years, in particular after the Lehman crisis in
2008, China’s macro leverage ratio has been growing rather rapidly. As illustrated in this figure,
the blue line, red line and green line represent enterprises, households and the government
respectively. It can be seen that the macro leverage ratio has increased by roughly 100
percentage points from 2009 to 2015. The leverage ratio in 2007 and 2008 was around 150%,
and then increased to around 250% in 2016, which means that all economic entities borrowed
considerably. This has drawn the attention of regulatory authorities and the authorities in charge
of macro regulation and control. In recent years, the central government has proposed to
facilitate “deleveraging”. Consequently, the leverage ratio has been standing at around 250%
since last year and has remained stable for almost eight quarters without further rise.
The monetary policy should be flexibly adjusted according to changes in the economic situation,
and counter-cyclical adjustments be particularly strengthened. If the leverage ratio is rather high,
or bubbles emerge in asset prices, the best strategy is “slow air-bleed” and “soft landing” so as
to make smooth adjustments to the economy. When the market or economy is impacted by
external shocks, we should take prompt measures to stabilize the financial market and, in
particular, to bolster market confidence. This is a fairly good regulation and control strategy. In
the next phase, the monetary policy is going to push forward with its continuous support for the
real economy.
Just now I talked about two subjects: the framework of our monetary policy and how the
monetary policy and finance support the real economy, in particular, how they support SMBs as
well as private enterprises. And with regard to private enterprises, my focus was on how the
second arrow in the three-arrow policy mix provides support for private firms in their bond
issuance.
Here comes the third part: how to guard against financial risks in the process of formulating
monetary policy. This calls for consideration of both monetary policy and macro-prudential policy,
so the “dual pillar” regulatory framework should be improved to enable the mutual promotion and
complementation of monetary policy and macro-prudential policy.
I would first talk about what risks we should guard against. Here are several examples. One of
the manifestations of major risks is abnormal market fluctuation and external shocks, for
instance, the marked ups and downs in the stock market or the bond market, or market panics
8 / 15 BIS central bankers' speeches
resulting from corporate defaults. Default means that an enterprise can’t repay the principal and
interest of its debt when time is due, which would cause panics. External shocks may destabilize
market expectations. At present, the pivot interest rate of money market stands at 2.6% with the
interest rate of excess reserves at 0.72% as the floor and the SLF interest rate at 3.55% as the
ceiling. The range of this interest rate corridor is relatively narrow. Why do we say it is not easy to
keep the interest rate within a narrow range? For example, when the Asian financial crisis hit
Hong Kong in 1998, the interest rates in HK could be as high as 300% plus. Just now I mentioned
that the money market rate stands at around 2.6%, the ceiling is over 3% and the floor is 0.72%.
External shocks may drive the interest rate up to 10%, 20%, or even several hundred percent. It
shows that if stricken by expectation or external shocks, the money market will probably suffer
from great fluctuations, so we need to consider preventing risk contagion among different
markets when making policies
