The People’s Bank of China (PBoC) is considering a rule change that would help legitimize semi-legal private lending firms. It’s the latest high-level acknowledgement of an uncomfortable truth: The US$1.4 trillion in new loans issued by domestic banks last year were overwhelmingly issued to state-owned enterprises (SOEs), leaving small and private enterprises largely out of luck.
By legalizing private lending firms that have long existed in a legal gray area, Beijing hopes to encourage growth of the country’s small businesses – a key part of its long-term goal of reducing the economy’s reliance on government investment. Legalization will also allow the government to more closely monitor lending activity to these enterprises.
The PBoC said it is also considering the removal of interest rate ceilings for microlending firms. These had been introduced as a protection against predatory lending policies; the PBoC now says the situation has improved sufficiently that the caps are no longer necessary. Reading between the lines, it appears the central bank believes that the risk of predatory lending is more than outweighed by the benefit of easier access to credit by non-SOEs.
The rule change has not yet been implemented, so any real market impact remains far off. Once implemented – and if implemented meaningfully – the short-term winners will be small companies with massively eased access to credit. Companies listed on the ChiNext small- and medium-sized enterprise board could be a particular focus of investor interest.