China's small businesses are having a hard time getting bank loans

• China's battle to cut debt in its economy has dealt a blow to smaller companies, according to French trade credit insurer Coface.
• They have traditionally been at a disadvantage in getting loans compared with big, state-owned companies, and top officials are acknowledging their plight.
• Small businesses account for the majority of companies in China and some play an important role in global supply chains, a major focus in the ongoing U.S.-China trade war.

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Workers producing clothes in a factory in Huaibei, China.

It's widely agreed that China needs to get its massive debt problem — estimated at more than three times the size of the economy — under control.

But that effort is also seen as overburdening an important sector, the country's small and medium-sized businesses, which are at the front line of the ongoing trade war with the United States.

Small and medium-sized firms make up the majority of Chinese companies and are major employers but have traditionally faced challenges competing with China's huge, state-owned enterprises for bank loans.

Adding to their importance, smaller firms are often part of intricate global supply chains that play a central role in Chinese exports, and thus vulnerable to the trade conflict with the United States.

China's debt-reduction efforts have left small companies "scrambling to access financial resources to meet their working capital and long-term expansion needs," French trade credit insurer Coface said in a report Tuesday.

A key element of the debt-cutting campaign targeted China's so-called shadow banking system, a web of lending carried out by firms that operate outside the formal banking sector and are therefore subject to lower levels of regulatory oversight — and higher risks.

That crackdown, however, has had a negative effect on small and mid-size enterprises, or SMEs, according to Coface.

"Cracking down on shadow banking deprived SMEs from accessing valuable working capital as well as longer-term financial resources," Carlos Casanova, Hong Kong-based Asia Pacific economist for Coface, said in the report.

A slowing economy and the trade war have forced authorities to tone down the debt battle in order to bolster growth, but small companies still face systemic difficulties in accessing bank credit, Casanova said.

He cited, for example, caps on interest rates that make banks reluctant to lend to smaller companies, which they tend to see as riskier borrowers than the state-owned giants.

Giving banks greater latitude when it comes to setting interest rates "would enable credit officers to write loans to SMEs aptly, striking the right balance between risk and reward," Casanova said.

'Game changer'

William Ma, chief investment officer at Noah Holdings in Hong Kong, agrees that small companies are at a disadvantage to the state companies when it comes to getting financing.

"In short, I think the key challenge on the SMEs is the lack of proper funding channels at a reasonable market rate to support their business," he told CNBC on Tuesday.

Authorities are clearly aware there is a problem and have been making high-profile public statements about the importance of supporting smaller companies.

On Oct. 19, Vice Premier Liu He told reporters that small and mid-sized firms need help, the official Xinhua news agency reported.

"We must pay high attention to the difficulties faced by micro, small and medium-sized enterprises and roll out precise and effective measures to help them," Liu said, according to Xinhua.

That was followed by a meeting on Nov. 1 between President Xi Jinping and representatives from non-state-owned companies, during which he vowed supportive measures including improved access to financing.

Effects may take time to trickle down through China's vast economy, but such interventions have been well received by investors and are seen as essential.

"It's a game changer," Ma said of Xi's high-profile intervention.

"It's very important to send a strong signal ... that the Chinese government is focusing (on) and supporting the private sector," he said. "It's a very iconic, high-level message."