Small and micro-sized enterprises play a vital role in stabilizing growth, creating jobs, promoting innovation and vitalizing the market at a time when China is in the midst of transforming its economy. Improving financial services to support small businesses is an important task in mobilizing financial resources to prop up the real economy and encourage entrepreneurship.

A plan released by the State Council on August 12 proposed eight ways to better finance small and micro-sized enterprises, which can be summarized in the following three respects.

First, large and medium-sized commercial banks need to allocate more financial support to small businesses. Credit growth for small businesses should be faster than the average level of other loans and should increase yearly, which has become a requirement when measuring banks' performance. As the country carries on its prudent monetary policy and keeps annual monetary credit at reasonable levels, more progress is needed to expand financing for small businesses when invigorating existing loans and boost the ratio of loans to small businesses against total new credit.

Second, small banks and financial institutions should be set up to expand the financing channels available to small businesses. The government should encourage the establishment of village banks and finance corporations in areas where small businesses are concentrated, and promote the establishment of private banks, financial leasing companies and consumer finance companies.

Third, more direct financing channels should be explored for small businesses. The criteria for the access to financing should be lowered for those enterprises that are innovative and rapidly developing. More trials of privately placed bonds for small business should be encouraged.

The first point, which is virtually an administrative requirement for large and medium-sized commercial banks, will be especially effective when the time comes to alleviate downward pressures on the economy. Yet, how long can the impact of administrative provision last?

What's really important is leading private capital toward the legal financial field, which depends on interest rate liberalization. Since small businesses are more capable of sustaining high interest rates than large and medium-sized state-owned enterprises, once interest rates are liberalized, large and medium-sized commercial banks may find small businesses more appealing.

While the first two approaches cannot be carried out immediately due to the fixed timetable of interest rate reform, direct financing is currently the best choice.

The most convenient and feasible way of direct financing is to issue privately placed bonds, which meets the demand of both small businesses and private equities.

Currently, most privately placed bonds lack an investment orientation. Only 10 percent of private equities in the world make money, and they often expect high rates of return on their investments. Small businesses, though thirsty for capital, are in possession of new technology, innovative products and new business models and have a promising future. Therefore, the privately placed bonds of small businesses and private equity need each other.

The government should formulate a set of detailed rules and regulations on the privately placed bonds of small businesses as soon as possible, in order to provide them with real financial support.

This is an edited excerpt of an article by Yu Muzhan, a financial commentator, published in Shanghai Securities News