A recent marked deceleration in the mainland's economy has once again placed the GDP growth figure under the spotlight. Official data released in July 2010 show that the country's GDP growth has fallen to 10.3 percent in the second quarter, from 11.9 percent during the first quarter, following government efforts to slow expansion and prevent overheating.

Some expect the third-quarter GDP growth to ease further, as did the robust export figures of May and June, when exporters rushed to ship their cargo to benefit from export tax rebates, before their July 15 expiration. With a poor outlook for the US and European economies, many expect exports to decline in the coming months. Against this background, the government should increase its expenditure and help boost domestic consumption to offset decline in exports and cooling in real estate.

To keep the wheel of the economy spinning, the government should continue to develop infrastructure projects nationwide and begin constructing public housing projects to boost the domestic economy, and provide social welfare to low-income families. However, the private sector really should participate in the process to help the government expand our economy.

The 2010 lending quota for the mainland banking system has been set at 7.5 trillion renminbi, about 64 percent (4.6 trillion renminbi) of which was given in loans in the first half of the year. Big conglomerates have used most of the amount. Few people have paid attention to the financing needs and importance of small- and medium-sized enterprises (SMEs). According to Zhang Jianhua, research head of the People's Bank of China, there were actually fewer loans given to mainland SMEs during 2009.

The advantages of expanding the role of SMEs in the economy are obvious. Doing so would help increase employment, diversify the local economy and contribute to wealth redistribution, and eventually boost domestic consumption and the GDP. More important, if lending to SMEs increased, the extra liquidity in the financial system would be less likely to flow into inflated sectors, such as the property and stock markets. It would also help diversify the loan portfolios of banks.

In general, SMEs are having difficulty accessing finance because they lack collateral, and banks must satisfy regulatory requirements on strict capital-adequacy and loan-deposit ratios. The Central Government, however, could promote nationwide SME lending programs in the banking system, if it simplified regulatory ratios and limited loan sizes to minimize potential risks.

The author is a visiting professor at Asian International Open University, an International Financial Commentator at NOW Business News Channel and founder of www.wongsir.com.hk.

(HK Edition 07/31/2010 page2)