Beijing moves away from state-directed lending to small firms, signaling a push for market-based credit allocation.
China will eliminate mandatory loan targets for small and medium-sized enterprises, shifting toward a market-driven credit system. The policy change aims to address concerns over poor-quality lending driven by quotas rather than commercial viability, which has led to balance sheet distortions and weak credit evergreening.
The targets were introduced to boost lending to SMEs, a sector often underserved by commercial banks due to higher risks and lower returns. However, the approach has been criticized for encouraging banks to meet quotas rather than assess borrower creditworthiness, undermining financial stability.
The move aligns with the People’s Bank of China’s broader push for market-oriented policies, including recent adjustments to its primary monetary tools. Alternatives to replace the targets may include fiscal guarantees, direct government support, or improved bond market access for SMEs.