China, the world’s second-largest economy, is poised to legalize its commercial finance industry, which it now regards as “gray” lending. According to recent reports in The Wall Street Journal, China’s premier Wen Jiabao announced that authorities are looking for ways to make China’s informal-lending sector legitimate.
The move will be tested in Wenzhou, a hub of business enterprise. Wenzhou is the third city of Zhejiang Province and one of the economic powerhouses of the region.1 The territory’s market sector includes a wide variety of informal asset-based lenders that serve small and medium-sized enterprises that continue to struggle to secure financing from China’s giant state-owned banks.
A Mirror of U.S Lending
In many ways, the situation in China mirrors that in the U.S. Small and medium-sized enterprises in China have been starved for funds because China’s giant banks are ill-equipped to lend to them, partly because of a lack of expertise in assessing risks.
China, a single-party state governed by the Communist Party, does not make changes to its financial system quickly or frivolously when it looks to the West. The Chinese, however, are acknowledging that the larger banks in their overregulated jurisdiction can be barriers to sustainable growth for small and medium-sized enterprises.
This development in China is strong validation of the way we have organized our own thriving commercial finance industry. Located strategically at the convergence point between macroeconomic activity and microeconomic need, commercial finance — especially through asset-based lending — stands ready to assist at all the key junctures in the life of a smaller business.
Strength in Core Competencies
The U.S. commercial finance sector grew during the financial crisis, when banking institutions pulled back credit. Made up of private lenders — whether family offices, private equity funds, hedge funds or private investors, the sector forms a valuable part of the economy that will always exist, even in recessionary economic periods.
Asset-based lenders and other commercial finance providers have developed sector and size expertise for both initial credit evaluation and ongoing credit management. These core competencies are what kept commercial financing strong through the economic downturn and expanding today.
Seven years after the financial crisis and reshaping of our banking community, asset-based lending is emerging as a still stronger and more essential component of small-cap and lower middle market business financing. Transformations in China’s business lending climate only cement this fact.
1. Wenzhou. Wikitravel. Available at: http://wikitravel.org/en/Wenzhou (last accessed on February 23, 2015.)
Jeffrey Sweeney, CEO and managing director at US Capital Partners, LLC, is an investment banker with years of experience in small business lending and advisory.