Overview Of China's Micro- And Small-Enterprise Financing

Over the past two decades, economic policymakers in China have implemented various measures to encourage growth in micro and small enterprises (MSEs)--a key driver of economic development in the country. To that end, lawmakers passed the "Law of the People's Republic of China on Promotion of Small and Medium-sized Enterprises" in 2002.

An opinion issued by China's State Council in 2009 further reinforced the importance of supporting MSEs. A key measure was to address financing needs by encouraging financial institutions to lend more to such enterprises.

The measures listed below illustrate regulators' support to MSEs, mostly with loan goals for banks. Key regulatory requirements over the years include:

• 2009 "Two no-lowers": (1) MSE loan growth rate cannot be lower than the total loan growth rate; (2) The incremental MSE loan growth amount cannot be lower than that of the previous year.
• 2015 "Three no-lowers": (1) MSE loan growth rate cannot be lower than the total loan growth rate; (2) Number of MSE loan accounts cannot be lower than that of the previous year; (3) The percentage of loan applications from eligible MSEs receiving loans cannot be lower than that of the previous year.
• 2018 "Two increases and two controls": (1) Growth rate of MSE loans of less than Chinese renminbi (RMB) 10 million to a single borrower cannot be lower than the total loan growth rate; (2) Number of MSE loan accounts cannot be lower than that of previous years; (3) Control MSE loan asset quality; and (4) Control the overall borrowing cost of MSE loans. The requirements, together with the State Council's "Plan for Advancing the Development of Financial Inclusion (2016-2020)", led to a rise in "Financial Inclusion MSE Loans" in Chinese banks.
• In April 2023, China Banking and Insurance Regulatory Commission (CBIRC; now known as the National Financial Regulatory Administration) issued a notice on MSE financing. Even though the notice did not include the "two increases" requirement, it stated the objective of enhancing financing support for MSEs. By the end of the year, disbursement of inclusive MSE loans increased more than 20% (see "Other Research" for details of the notice in Chinese).

To help support specific types of enterprises, various regulators and government departments published MSE definitions for different sectors in 2011, and another definition specifically for the financial sector in 2015.

Financial Inclusion In The MSE Equipment Lease Sector

Lessor type

There are three types of lessors, namely foreign-owned lease companies (foreign Shangzu), domestically-owned leasing companies (domestic Shangzu), and financial leasing companies (Jinzu; bank-affiliated). They are all regulated by National Financial Regulatory Administration.

Size and select players

Bank-affiliated leasing companies provided RMB1.02 trillion in financing to micro, small, and medium-sized enterprises (MSMEs) during 2023 , growing 36%. By the end of 2023, the lease receivable balance for MSMEs reached RMB2.03 trillion, up 9.33% from a year ago.

There is no public aggregate data available of financing provided by non-bank-owned leasing companies. Instead, some active players have released disparate data. For example, one player announced that it has provided lease financing to nearly 70,000 MSEs, with a total amount of more than RMB85 billion by the end of 2023. Another player said that it has provided lease financing to over 70,000 MSMEs as of end-2023.

Many lease companies have tapped the MSE sector to both support the government's policy direction and explore unmet demand.

Credit-related industry infrastructure

The People's Bank Of China (PBOC) set up the national credit bureau to collect finance- and credit-related data. Financiers can access this data for underwriting purposes, if approved. Over the past three years, the size of the database has tripled. As of the end of 2022, the bureau has collected the credit data of over 50 million MSEs and about 13 million individual business owners. Access to the database helps leasing companies with credit underwriting.

Online registration publicity of chattel financing

The requirement of unified registration for chattel financing in the Unified Registration and Publicity System for Chattel Financing managed by the Credit Reference Center supervised by PBOC was unveiled in 2021. This online platform is aimed at facilitating registration and publicity of chattel financed to provide transparency and prevent duplicate financing.

As of end-2022, the number of registrations associated with MSEs reached 67.5 million, rising 35% year on year, and MSE-related registration accounted for 88% of the total number of registrations.

Strengthening regulatory oversight of the leasing sector

Since 2018, Chinese authorities have tightened regulatory requirements and set quantified standards for the three types of lessors. Regulators released a series of rules and notices to strengthen leasing companies' risk management, improve corporate governance, boost compliance, and enhance information disclosure. These directions broadly aim to enhance leasing companies' operational stability and ensure their business is focused on secured financing.

S&P Global Ratings believes strengthened regulatory oversight would help players conduct businesses in a more sustainable way and reduce fraud.

Features Of MSE Lease Products

This primer focuses on securitized financial lease products. Based on public information, here are some characteristics of these products:

• Lease arrangement--Direct leasing finances the purchase of equipment. Sales and leaseback finances equipment that has been owned by the lessee.
• Credit limit--The credit limit range is usually between a few million and RMB10 million for offline, in-person applications. Credit limits for online applications tend to be much smaller, at about RMB1 million.
• Tenor--A tenor of less than three years is most prevalent. Some financiers offer longer lease terms of four to seven years.
• Interest Rate--Interest rate mostly ranges from the high single digits to high teens, and is usually higher than the rate for MSE loans that banks provide.
• Credit enhancement--Practices to mitigate credit risk may vary by originator. In addition to liens on underlying lease assets, the most common measures include cash security deposit and guaranty.

MSE Lease ABS Issuance Trend And Top Issuers

The first issuance of MSE lease asset-backed securities (ABS) in China was in 2018. Afterward, issuance soared, and peaked at about RMB21 billion in 2021 and 2022, before declining to about RMB16.4 billion in 2023.

Since 2024, MSE lease issuance resumed growth. In the first eight months of 2024, issuance of MSE and inclusive lease ABS totaled RMB15.4 billion, with over 75% of deals issued under the exchange ABS scheme and the rest under the National Association of Financial Market Institutional Investors scheme.

Chart 1

Key MSE Loan ABS Issuers

Equipment lease ABS have quite a few frequent issuers. These originators have diverse backgrounds and focus on different market segments. The chart below shows key originators that have sponsored at least four ABS each between the start of 2018 and the end of August 2024.

Chart 2

Important Points From A Rating Perspective

Remittance frequency and potential servicer commingling risk

Most lease receivables securitized in China are fully amortized, with payment to be made every month or every quarter. Some financiers provide customized repayment schedules, based upon our observations of frequent originators' securitized portfolios.

S&P Global Ratings assesses commingling risk exposure with the servicer, based on the amortization schedule and remittance frequency of asset collections to the issuer. We address potential loss or delay in our cash flow analysis to address the commingling risk if there is no sufficient structural mechanism in the transaction to protect the issuer from any loss or delay in receiving funds in the event of the servicer's insolvency.

Recovery to be reviewed case by case

Like other financiers related to the securitization transactions that we rate in China, equipment leasing lessors generally adopt a staged approach to arrears management. Depending on the degree to which lease payments are in arrears, lessors can take actions such as automatic text messaging, phone calls, or on-site visits, and restrict access to the leased assets.

Lessors would also seek payments from guarantors or offset the required payments against the lessees' security deposit. For leases deemed to be in default, lessors initiate a foreclosure process, which may involve legal petitions and liquidation, or leasing the assets to a different customer.

The length of the foreclosure process and recovery rate vary by asset type. Generally, arrears management tends to be more complicated for specialized and niche leased assets because the second-hand/resale market for these assets is not as developed as plain vanilla assets such as construction machinery and commercial vehicles, and it would be more challenging to identify a new lessee for these assets.

S&P Global Ratings Research

• China Securitization: ABS and RMBS Tracker August 2024, Sept. 27, 2024
• China Securitization Performance Watch 2Q 2024: Weak Issuance Will Likely Persist, Aug. 9, 2024
• China Structured Finance Midyear Outlook 2024: New Issuance Will Likely Fall For Another Year, July 8, 2024
• A Primer On China's MSE Loan ABS Market, May 10, 2023
• A Primer On China's Equipment Lease ABS Market, March 2, 2023

Other Research (in Chinese)

• CBIRC Notice on MSE Finance in April 2023, China Banking and Insurance Regulatory Commission, April 20, 2023
• Financial Sector MSE definition, The People's Bank of China, Oct. 9, 2015
• Sector specific MSE definitions, State Council of the People's Republic of China, July 4, 2011