chapter  13
24 Pages

The Debt Financing Gap for Small Business in China

WithChangwen Zhao, Kun Li

The development of small-and medium-sized enterprises (SMEs) is an issue attracting global attention. The existing research shows that SMEs at different stages of their life cycle have varying optimal financing choices. Many studies emphasize the importance of developing small banks and other financial institutions with information advantages in making loans to small businesses. Information asymmetry and moral hazard are common problems banks face when making loans to firms. The high cost of SME lending is the main barrier to reducing the financing gap for SMEs. The Chinese government may learn from the experiences of other countries and invest more in governmental funds to provide loan support for SMEs. The reform of the state banks should target improvement of corporate governance and gradually phase out interest rate control. China's entry into the World Trade Organization shows its determination to build a market economy and further open up to the outside world.