China's Business Environment -- business loans

It's true that nothing makes you appreciate what you have more than when you realize that other people don't have it. I have 3 business entities to my name and yet it never occurred to me how friendly to small to medium businesses the U.S. is, until I learned about the business environment in China.

China is a business environment that favors huge state owned enterprises over small to medium businesses. The amount of small to medium businesses that exists and survive is almost despite the system. In a previous post I talked about what it took to create a business entity in the first place. This one we'll focus on loans.

The chinese commericial economy used to completely dominated by state owned enterprises, where the management in them were basically government officials who managed the businesses by following the memos and memorandums that were passed down the chain of command. They had no personal gain attached to the actual profit of the business. Imagine if getting your cell phone is pretty much the same as getting your passport. When market economy arrived in China, the government basically waved a wand over a lot of the state enterprises and said "now you're a private enterprise." Now the same officials became businessmen, and the profits go straight into their pockets as there are no stock holder interests to be concerned about. However, as far as commercial loans are concerned, these are still the "state" enterprises. Remembering that the big banks are all still state owned enterprises, if a bank loans a few hundred million to a "state" enterprise and the loan defaults, there's no responsibility, no punishments, no downside, for anyone. Since it's all the State, it's like it's in the family, except not in the Italian mafia style. On the enterprise side, there's no fault in loosing a lot of money trying to business, because you see, that's actually much better than the money disappearing through corruption. So you get into a situation where the banks actually push loans onto large enterprises, the ones who don't really need the monetary support. I have family who used to manage a branch of China Bank, and it's very interesting how the loans operate. Each bank's loaning institution gets a quota handed down from the governement every year about how much they need to loan out for a specific industry that's the development focus. If you don't use the money then it's gone, it's not like you can even move it around to loan some extra to another industry. With that, and given the few "no-fault" enterprises that you can loan to with no personal risk, the banks literally wine and dine large enterprises to push money on them.

The small to medium businesses however, have a very hard time getting business loans. If a loan officer grants a loan to a non-"state" businesses and there's a default or late payment, the loan officer gets fired. Simplicity has its merits of course, but remember that this is also a country with no credit system to check on the credit of a business or person and there's no established processes for what happens on loan defaults: 1) there's no actual property ownership so it's not like you can take away the business property 2) there's no bankruptcy laws that I'm aware of and 3) there's no formal collecting agencies outside of literally hiring some thugs. So how do small-medium businesses get loans? If you're just starting, unless it's your life savings then you used to work in the state somewhere, preferrably a bank, and you have connections. If you've been in business for a while, hopefully your industry actually has a quota for loans and you are based in and apply in an area where you're even close to being medium sized fish (that means your chances are better in Chengdu instead of Shanghai), and you've developed your connections over the years with the right people. Oh yeah, every loan application is accompanied by a business plan on what this is used for, and how much. The banks will loan about 70% of total amount to your investing 30% of the total money required, and that business plan is usually 50+ pages with lot of how this will help the country as a whole. Interest is right now 8.5% and if you're looking for loans around a few million dollars, you can just forget it. There's simply no such amount of loans for small-medium businesses, even though the banks throw the equivalent of hundreds of millions of dollars at the large state enterprises.