According to Gao, there are also external reasons for SME financing difficulties. On the one hand, because of the unsound guarantee system, many SMEs cannot realize their financing demands. For example, since there is no compensation solution to guarantee institutions, they must bear the losses themselves if they fail to pay back the loans, influencing their initiatives to be guarantors. On the other hand, the system constructed for the financing of SMEs is not sound. Although China has promulgated the Law on the Promotion of Small and Medium-Sized Enterprises and issued measures for implementation, the practice is still in its early stages. Moreover, since the direct financing system in China is not perfect and the second-tier market has only recently been established, SMEs have few channels to financing by being listed.

Some commercial banks also tell Beijing Review that by now, most of them deal in mortgage loans and the best bet for them is in financing real estate. But most SMEs are short of fixed assets and cannot meet the demands of mortgage loans, therefore banks often refuse to grant loans to them when considering the risks.

Peng Yijie, Vice President of alibaba.com.cn, says that as the Chinese economy develops, SMEs will become the driving force of economic development. With 30 million members, alibaba deeply understands the present situation and demands of Chinese SMEs based on its long-standing practical experience. "Chinese SMEs have to depend on loans to get financing, but because of an imperfect credit system, there is no channel for banks and companies to communicate," Peng said. "Financing difficulty has long been the largest obstacle to the development of SMEs. Alibaba is trying to change this situation."

Establishing a platform

Early in May 2005, ICBC and alibaba signed an agreement in Beijing for strategic cooperation on e-commerce and have been looking for possibilities of cooperation in related fields. As for the online credit loan service, alibaba has spent two years preparing a set of credit ranking mechanisms and a credit database. At the same time, it has also developed a risk- control system for the three stages before, during and after the loans are granted in order to help banks control credit risks.

Now, alibaba has established a whole set of credit rankings and a credit database with credit records going back six years. Only parties to real transactions have the ability to assess each other. Together with network system technology improvements, almost all doubtful transactions can be scanned and identified. Coordinated with punishment measures, most of the present credit records are reliable. The information includes both certification from authoritative institutions and online real time interactions, reflecting business activities from different angles.

This system provides effective evidence of each company's credit record when granting loans. ICBC will grant loans to SMEs based on the online credit of alibaba members, thus reducing the risk costs in granting credit.

"Both of us hope to establish a virtuous circle that online transactions will help accumulate online transaction credit records, the accumulation of online transaction credit will be transferred to the accumulation of banking credit, and the banks will provide online traders with more financing services, which will stimulate the development of both online traders and online transactions," Peng said.

However, the difficulty of SMEs in securing financing cannot be solved by only relying on the credit system of alibaba. Besides credit loans, cooperation between alibaba and ICBC will also be concentrated on research and development of B2B online payment intermediate platforms, with functions of online payment, multiple credit support, trading financing and consultation services. The measures are meant to dispel misgivings of many enterprises regarding online payments.

Ma Yun, Chief Executive Officer of alibaba, says that through cooperating with the banks, alibaba will establish a new e-commerce platform and a new pattern connecting online transactions. These include payment and financing services and will help nurture the online transaction financing market and promote the development of SMEs. In the future, more online traders with good reputations will become the beneficiaries of these platforms.

However, alibaba will not pay for the process of SMEs securing loans. According to Peng, the online transaction financing platform set up by alibaba is not profitable, but is meant to support the development of SMEs. At the same time, alibaba will not provide guarantees for its members. "Alibaba does not wish to seek profits by being an intermediate, nor will it assume risks," said Peng.