It seems like the historic transformation of China’s loan-to-deposit ratio at hand, as a law that has been in place since 1995 mandating that lending be limited to 75 percent of deposits, has been put on the path to becoming a mere reference point rather than a regulatory statue. Following a State Council statement on June 24, which indicated a forthcoming proposal to amend the nation’s loan-to-deposit ratio law, the floodgate is now apparently opening to SME lending. As Chinese Premier Li Keqiang moves to get better handles on the massive state-run banking sector, which has some $29 trillion in assets (or nearly twice the size of the same sector in the U.S.), this move to rev up the country’s credit lending engine has already ignited a firestorm of activity among Chinese banking stocks.
The State Council decision to try and make it easier for banks looking to lend is a clear expression of the growth potential of the service sector in China, where the opportunities for small, private-sector businesses are now quite abundant. The unmistakably clear signal from the CBRC to boost lending to SMEs, in an effort to outstrip last year’s enormous, roughly $3.34 trillion in small business loans, is a strong response to overall economic growth slowing to 7.4 percent last year. While a 20-year low, this growth figure is still considerably higher than the 2.4 percent figure for the U.S. last year. We are looking at a primed environment in China for integrated lending solutions; a sector which could explode over the next several years, especially if growth in the overall Chinese economy continues to shrink slightly each year moving forward, showing how much infrastructural build-out has truly been accomplished.
A burgeoning Chinese SME sector, increasingly dotted by service entities and light industry, is an ideal environment for leading provider of integrated lending solutions, Sino Mercury Acquisition (NASDAQ: SMAC). Sino Mercury Acquisition, operating through the post-acquisition Wins Finance Holdings, Inc., which is worth around $168 million, continues primarily doing direct equipment leasing, as well as purchase-lease-back, and providing financial leasing, guarantee and advisory services to SME markets in Shanxi Province and the PRC capital, Beijing.
Wins Finance conducts its financial guarantee business through its wholly-owned Shanxi Dongsheng Financial Guarantee subsidiary and was one of the first batch of companies to receive the China Financial Guarantee Permit for Business. Right in the heart of the action, SMAC is busily facilitating SME financing through its guarantor activities, working with clients to craft customized financing plans that suit the size, scale and industry of a given SME, and securing the repayment of debts from any guaranteed borrowers that may default.
The small lending sector is so hot right now in China that even Amazon (NASDAQ: AMZN) rival, Alibaba (NYSE: BABA), is getting into the market via the recent launch of what is effectively the second online bank to go live in China this year with a premade audience, MYbank. MYbank directly connects Alibaba merchants and lenders, leveraging the credit and sales data available from Alibaba’s zero-fee, third-party online payment platform, AliPay, which has over 300 million users. With an army of over eight million vendors, bolstered by mostly small or micro sized operators, Alibaba’s Taobao Market has had a revolutionary impact on how customers and entrepreneurs are connected in real-time. SME lending for equipment keeps this market humming and that is one big reason a company like SMAC is poised to branch out and become a platform solution for markets well beyond the Shanxi region.
Sino Mercury Acquisition’s focus on SME lending makes SMAC well-poised to profit in such an environment as this, especially given the full range of individually-tailored consultancy services Wins Finance provides. By really getting to know the client’s business, financial condition and needs, as well as the requisite quantity and usage plans for the loan, Wins Finance is able to keep tight control over defaults and help maximize funding availability to SME clients at the same time. The company’s tireless dedication to being the tip of the spear in the SME space over the last several years has given Wins Finance a better smell for this market than other financial institutions like state-owned banks.
To further ensure success with each individual case, Wins Finance provides additional cash flow management, comprehensive financial planning, and tax savings advice. The financial leasing arm of Wins Finance is Jinshang International Financial Leasing, which has previously executed several big contracts in the healthcare, as well as energy and environment industries. The strong ties to regional banks and financial institutions developed since Jinshang International’s inception in 2009, culminating in such major contracts, has given this division of Wins Finance ample opportunity to hone a talent for financial product design and implementation as well.
China’s central bank put the figure for operating microcredit companies in the country last year at around 8.2k, up 36 percent since 2012. However, because only about 10 percent of these companies serve the widest financial inclusion possible and because they previously lacked greater incentives to really jump start lending, the sphere of less-profitable microlending has gone largely untapped.
The outlook is bright for SMAC and future plans for Wins Finance include a series of additional integrations and mergers designed to strengthen the company’s existing footprint, beefing up its asset management, as well as other financing operations, such as commercial factoring and microfinance. Commercial factoring for instance, which originated in the textile industry, is the selling of accounts receivable in order to lay hands on immediate capital, and the practice represents a kind of fluid debt-financing that is particularly attractive to many SMEs in China. According to analysis from November 2014 of the global microfinance sector, this year was projected as clocking in another impressive uptick of 15 to 20 percent growth (responsAbility Investments), with Asia in particular emerging center stage.
After many years putting together a first-class team of managers and really honing its long-term strategic approach to the SME lending sector, Wins Finance is now ready to make good use of the relationships it has established within the regional ecosystem of finance partners, government entities and SME customers. By being able to deliver a visionary, scalable, one-stop-shop solution that is designed to solve Chinese SME financing problems, the company has the potential to rapidly proliferate. A broad-spectrum platform approach to the space, including a diverse product mix and innovative modeling, will serve Wins Finance well as it continues to act as a much-needed bridge between banks and SME customers.
With well over 8.5k guarantee companies and 1.2k financing leasing companies currently in China, the market is obviously quite fragmented and thus, a scalable platform solution like the one Wins Finance has put together could become a disruptive adaptation, whose roll out just so happens to be perfectly timed to coincide with the prevailing easing of the loan-to-deposit ratio.
For more information on Sino Mercury’s Wins Finance acquisition, visit www.winsii.com/en