Policy support for SMEs with innovation capabilities

Editor's note: The People's Bank of China has announced a package of measures to support technological innovation. Pang Ming, a senior researcher at the National Institution for Finance and Development, wrote an article for 21st Century Business Herald on the significance of the measures. Below are excerpts. The views don't necessarily represent those of China Daily.

The central bank will provide a relending quota of 1 trillion yuan ($143.4 billion) to small and medium-sized private companies and increase the relending quota for technological innovation and upgrades by 400 billion yuan.

What matters most is not the additional 400 billion yuan lending quota, but the change in the criteria to determine which private SMEs can access the finance. For the first time, the intensity of investment in research and development has been made a key factor in the lending criteria.

This is a clear departure from earlier approaches that relied mainly on static indicators such as asset size, collateral and credit records.

Under the earlier framework, more mature firms with substantial assets and collateral were more likely to obtain financing, while many start-ups operating at the technological frontier — typically characterized by high R&D spending, light assets and volatile cash flows — were often excluded.

The new policy signals a formal recognition of the market value and creditworthiness of a company's intellectual capital and innovation activities. Rather than focusing too much on a company's existing financial strength, it shifts the emphasis to whether enterprises are willing to commit resources to research and innovation. This in turn guides financial institutions to build risk assessment models based on the innovation potential of a borrower and its long-term growth prospects.

Expanding lending support to private innovation-oriented SMEs with high R&D intensity will directly and effectively ease the cash-flow pressures inherent in the "light-asset, heavy-R&D" model. With the expanded scale and coverage, low-cost capital from the central bank can encourage commercial banks to increase the credit supply, reduce lending rates and interest burdens for innovation-oriented SMEs, and provide more stable cash-flow support for their R&D endeavors and business operations.

Another key reform is the integration of bond financing facilities for private enterprises with the science and technology innovation bond risk-sharing tools. This not only creates a larger and more clearly defined pool of risk-sharing funds but also forms a more unified and flexible risk-sharing framework. It sends a strong signal to the market that policy support for innovation-oriented private enterprises will be sustained.

After the integration, the combined tool will better target entities that are both private and innovation-driven, while standardized risk-sharing arrangements will boost market confidence in bonds issued by private enterprises, especially private tech firms, and reduce risk premiums.

For enterprises, the unification and simplification of management rules will lower participation barriers for financial institutions and expand the pool of eligible firms. More medium — to high-credit private tech companies with strong growth potential will gain access to bond market financing that was previously difficult to reach, improving market acceptance, issuance success rates and overall financing availability, enabling firms to issue bonds more smoothly.

At the same time, unified credit enhancement support can narrow credit spreads on bonds issued by private tech enterprises, improve liquidity in the secondary market, reduce overall financing costs and compress risk premiums, making bond financing more affordable and sustainable.

From a cost perspective, relending reduces banks' funding costs and encourages them to provide medium-and long-term loans to tech firms at more favorable rates, broadly lowering interest expenses for enterprises. By sharing credit risks and strengthening market confidence, the bond risk-sharing tool helps reduce bond issuance yields and underwriting costs, enabling firms to issue long-term bonds at lower interest rates.