China to scrap SME loan targets in shift toward market-driven credit, report says

China is set to cancel mandatory loan targets for small companies as part of a broader policy shift toward market-driven credit allocation, according to Shanghai Securities News.Summary:
According to Shanghai Securities News, a state-backed Chinese financial daily:China plans to cancel mandatory loan targets for small and medium-sized enterprises, marking a significant shift in how Beijing directs credit to the sectorThe targets were introduced to compel state banks to channel lending to SMEs, a sector commercial lenders naturally underserve given higher credit risk and lower returnsThe move is widely interpreted as a recognition that quota-driven lending has produced poor quality credit, with banks issuing loans to meet targets rather than on genuine commercial merit, contributing to evergreening of weak credits and balance sheet distortionCancelling the targets is consistent with a broader PBOC push toward more market-oriented policy frameworks, including the recent elevation of the seven-day reverse repo rate as the central bank’s primary policy instrumentThe shift raises questions about what replaces the targets as a support mechanism for SMEs, with fiscal guarantees, direct government support schemes or improved bond market access among the most likely alternativesShanghai Securities News carries reasonable credibility on domestic Chinese policy matters as a state-backed publication, though confirmation from official channels or the PBOC would be needed before treating the report as definitiveChina is set to cancel mandatory lending targets for small and medium-sized enterprises, according to a report in Shanghai Securities News, in a move that signals a meaningful shift in how Beijing directs credit through its state-dominated banking system toward a sector it has long regarded as a policy priority.The loan targets were introduced as a blunt administrative tool to force state banks to channel credit to small firms, a segment of the economy that commercial lenders would naturally underserve given the higher credit risk and lower margins involved. In principle, the mechanism ensured that SMEs, which account for a substantial share of Chinese employment and economic output, were not crowded out of the credit market by larger, lower-risk corporate borrowers. In practice, the targets generated well-documented distortions: banks issuing loans to hit quotas rather than on genuine commercial assessment, the rolling over of weak credits to keep headline numbers intact, and a gradual deterioration in the quality of SME loan books across the sector.Cancelling the targets can therefore be read as a policy maturation rather than an abandonment of SME support. The question Beijing must now answer is what replaces them. The most likely alternatives include expanded fiscal guarantee schemes that share the credit risk between government and lenders, improved SME access to bond markets, or direct state support programmes that do not route subsidy through the banking system’s balance sheet. The choice of replacement mechanism will determine whether small firms ultimately find credit easier or harder to access in the new framework.The move sits comfortably within a broader pattern of financial policy liberalisation visible in China this year. The PBOC’s shift toward the seven-day reverse repo rate as its primary policy instrument, away from the more administratively set Loan Prime Rate, reflects the same underlying impulse: replacing directive tools with market-oriented mechanisms that allow price signals to do more of the work of allocating capital. Taken together, the two developments suggest Beijing is pursuing a more coherent and less interventionist financial framework, though the pace and consistency of that shift will continue to be tested by the pressure to support growth in a challenging external environment.Shanghai Securities News is a state-backed financial daily with reasonable credibility on domestic policy matters, though the report has not yet been confirmed through official PBOC or government channels.—The removal of mandatory SME lending targets is mildly positive for Chinese bank stocks, reducing pressure on lenders to extend commercially questionable credit purely to meet quotas, which has historically weighed on asset quality and return metrics. For broader China credit markets, the move fits a pattern of incremental liberalisation that includes the PBOC’s shift toward the seven-day reverse repo rate as its primary policy instrument, suggesting Beijing is pursuing a more coherent, market-oriented financial framework rather than relying on administrative directives. The risk is that SME credit access deteriorates in the near term if banks, freed from targets, revert to natural commercial preferences and underserve the sector. How Beijing replaces the targets, whether with fiscal guarantees, direct support schemes or bond market access, will determine whether this is a genuine upgrade of policy or simply a withdrawal of support dressed as reform.—As a ps, unrelated ,,, South Korea’s Kospi is opening weak again, down 2%
This article was written by Eamonn Sheridan at investinglive.com.

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