Getting a business loan in China and why it won’t happen for your company
Article by Matt
Last year a friend of mine came to me with a project for an American company that was trying to get a business loan from a major bank here in China.
I asked some banking lawyers in Hong Kong what they thought the client’s chances for obtaining a loan in China were and they all agreed that it would be pretty unlikely.
Basically it is most unlikely that a foreign company without a track record of dealing with Chinese banks will obtain credit lines from Chinese banks.Chinese banks are moving toward becoming standard Western commercial banks – they always look for profitable and safe investment, but this is a very slow movement.
When they do extend credits to what may look like risky borrowers, it is always because either they are pressed by local governments or some key bank managers are otherwise influenced in the decision making.
In practice, local governments may act in favor of major FIEs that matter to local economy, but perhaps not a “pure” foreign company.
So, unless they have a track record of doing a significant amount of business in China or they have funded major investments in infrastructure development or they employ a large number of Chinese workers they don’t have much of a chance.You might be able to get financing if you can persuade a local government to give the banks a nudge, meaning you either employee a huge number of local Chinese in your company or JV or you have enough pull with the local government to get them to go to bat for you.
It got me to thinking about Chinese banking, the big 4 Chinese banks have some of the largest holdings of bank in the world, how do they make loans? Why would foreign businesses have such a difficult time getting funding? The answer comes down to a practice called “Window Guidance”.
Window Guidance is a favorite tool of the PBOC, this is an idea that is borrowed from the Japanese banking system.
The PBOC uses window guidance to “guide” the lending polices of the big 4 banks.
This is accomplished through a combination of moral pressure, to support the national government’s policy wishes, and the hidden threat of “complications” with money supplier from the central bank, as the PBOC controls this lending.
By allowing the market to make an “educated guess” as to what the lending policies of China’s biggest banks will be, the PBOC allows the largest banks to appear to act independently but in actuality, they are somewhere in between the planned economy and a completely market based economy.
While the central bank does not technically direct the lending of the big four banks, they do apply pressure in the banks to follow the governments policies.
The big four banks generally adhere to these policies because the PBOC provides the banks with loans.
These direct loans from the PBOC to the commercial banks are a very useful tool in maintaining the stability of the financial system.
Providing banks with a gift wrapped mini bail out allows them to work through difficult times without being completely accountable to shifts in the market.
The opposing argument, often heard regarding U.S. financial market bailouts, is that these types of low interest loans will encourage the banks to engage in risky behavior with less restraint, because they expect to be taken care of.
These financial institutions will then become too big or important to fail, forcing a government to take more responsibility in overseeing the operations.
Having the government’s monetary policy so closely intertwined with what are regarded as independent private banks in the west is a troubling thought for those that tout the free market over all.
But judging by the manner in which recklessness and greed played such an integral part in the deep troubles of the American and European banking systems, maybe having a government oversight committee is an intelligent move.
Giving the committee some real power to act and intervene when it sees potential abuse seems to be an intelligent solution to the West’s current banking system difficulties.
Window guidance is a very important tool for the PBOC, it will play a major part in the Chinese government’s 2009 economic stimulus plan.
The central bank has made it very clear that they expect their contributions to the economic stimulus package to be matched, on a 1 to 1 ratio, by the big four central banks.
This is also a policy that the West should strongly consider using, there needs to be some balance between allowing a free market to guide itself and making the big national banks into puppets that are incapable of making intelligent decisions of their own free will.
The type of cooperation that China promotes between the responsible government agency and the banking sector is a model that the west should attempt to emulate with the shares they have acquired “bailing out” western banking entities.
Matt is apart of Southern Perspective SZ and has been working in China for the last six years.