[ET Net News Agency, 11 June 2019] Moody's Investors Service said that improving the
structural incentives for banks to increase private sector lending will be key to
encouraging the formal banking sector's support of privately owned enterprises (POEs).
If successfully implemented, credit guarantees and policies designed to improve the
availability of information on POEs would help shape a more market-based form of bank
lending to POEs over time, a credit positive for private sector companies and China's
sovereign (A1 stable).
"Quota-based measures are unlikely to change the banks' behavior in the long run," said
Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.
"However, policies that lead to more informed risk pricing should improve credit
availability for POEs, despite the practical implementation challenges."
"On the difficulties of implemention, the banks could, for example, be reluctant to
share relevant information with other institutions on a consolidated platform," added
Taylor. "Moreover, the consolidation of the POEs' credit profiles by local governments and
various local government agencies will take time."
Moody's explained that the financing needs of private corporate borrowers in China have
long been underserved by the formal banking sector because of structural factors,
including implicit and explicit government guarantees for state-owned enterprises, and
information asymmetries between lenders and private sector borrowers.
"POEs underserved by the formal banking system have been reliant on shadow credit," said
George Xu, a Moody's Analyst. "But China's crackdown - since the end of 2016 - on shadow
banking to contain financial systemic risk has reduced credit availability for these
POEs."
"While the authorities' measures will lead to rising POE exposure for the banks, and
therefore higher credit risks to the banks and collateralized loans obligations, greater
information availability and enhanced credit risk mitigation schemes would help alleviate
the risks," added Xu. (KL)