Fledgling guaranty companies should endeavour to expand their scale and strengthen their competitiveness to provide more efficient financing for small and medium-sized enterprises (SME), experts say.

The rapid development of SMEs over the past 10 years requires more financing support and creates huge potential for guaranty companies.

The past four years saw eye-catching growth in guaranty companies, whose number soared from only a few in 2,000 to about 4,000 in 2004. By June of 2003, the total capital of guaranty companies topped 120 billion yuan (US$14.5 billion), according to statistics from the department of SMEs with the National Development and Reform Commission.

Guaranty companies profit competence is also growing.

Shenzhen Credit Orienwise Co Ltd, one of the largest private guaranty companies, raked in 81 million yuan (US$9.76 million) of profits in 2003, jumping from 37 million yuan (US$4.46 million) in 2002, Wei Yong, general manager of Beijing Credit Orienwise Co Ltd said in an interview.

In spite of the tremendous development, China's guaranty companies are still burdened by their limited scale and strength, according to Tang Min, chief economist with the Asian Development Bank's resident mission in China.

Most existing guaranty companies are of small scale, and there is not a comprehensive and nationwide company in China yet, thus making their credit and capital limited, Wei said, echoing Tang's view.

"To make guaranty companies more competitive, the government can do more in rendering more supporting policies instead of confining their help to provide capital," Tang said.

Presently, there is not a regulatory commission for guaranty companies. And another problem arises: Should there be a particular regulatory commission for guaranty companies? If so, who will implement the supervision?

According to Wei, all the tasks can be left to the market. "The market mechanism, rather than regulatory commissions, runs more efficiently in dealing with problems," he said.

"The core of guaranty companies is credit, if banks don't believe in you, then the company will eventually be kicked out," Wei added.

Tang shared the same viewpoint, "Actually, banks play the supervisory role," he said.

Another factor blocking the development of guaranty companies is the lack of non-governmental capital participation. About two thirds of guaranty companies are government funded.

Around 1996, the government encouraged the establishment of guaranty companies in local areas to render more support for SME financing.

"The unsound legal system in China as well as insufficient co-operation with other financial institutions also hinder the growth of guaranty companies," Tang said.

Currently, there is not a particular law for guaranty companies.

Despite the existing difficulties, guaranty companies do have the potential to gain more market share due to the huge development room left by China's lagging banking business.

"Banks and guaranty companies are complementary to one another, and the latter can help the former to expand their business scope," Tang said.

Due to China's under-developed financial system, guaranty companies boast large development potential.

Currently, there are three types of guaranty companies in China. China National Investment & Guaranty Co Ltd, the first guaranty company in China, is an example of the government-funded companies.

Others like Credit Orienwise Group, are privately-owned, while some are joint ventures between the government and the private sector.

Private commercial guaranty companies should be the backbone of the industry, government investment should not be the main source, Tang said.

"The commercial model can be also applied to the vast rural areas," Tang suggested, "Guaranty companies can be organized by leading local enterprises since they have the capital and know the local residents well, thus providing convenience for their financing."

In addition, there is one more model, called mutual aid and co-operation guaranty institutions, which works well in Zhejiang. They are organized by industry associations and adopt membership systems. But different from others, it is non-profitable, he said.

During the development process, credit worthiness and scale are the major concerns as credit is the premise for guaranty companies, Tang said.

"Thus, we should focus on expanding the scale and strengthening competitiveness rather than setting up more guaranty companies," Tang said.

"Though the total number of guaranty companies has topped 3,900, only 100 to 200 are running business in a real commercial mode and maintain proper business," Wei told China Daily.

The misdeeds of some guaranty companies also arouse experts' attention to the possible credibility crisis for the guaranty industry that has occurred in other financial sectors.

If the government finds serious problems with one of the guaranty companies and takes a uniform prohibitive measure, the development of the whole guaranty industry will be throttled.

To solve the problem, a credit rating system together with a reguaranty system may help.,

Tang suggests the government play a vital role in drawing up supporting regulations, training professionals and encouraging nongovernmental investment.

Currently, the government is brewing an account calculating system and a management scheme on guaranty companies.

Close co-operation with international institutions could also contribute to the development of guaranty companies.

Source: China Daily