"Any obstacles SMEs meet will have a ripple effect on China's economy and society," Chen said. "The government must help them out of the financing predicament."

Help is on the way

"Long-term efforts are needed to solve the financing problem of SMEs," said Yi Xianrong, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Sciences. "It's not a problem that can be solved by expanding credit quotas or establishing an SME bank. A credit quota rise can only ease the pain."

Although the central bank's policy of raising credit quotas will help ease the financing burdens of SMEs, it is much more important that the government allows qualified and capable institutions to provide financing services for them, Yi said. For example, the government should legitimize private banking services that already issue loans to SMEs.

The central bank and the China Banking Regulatory Commission released guidelines for a pilot program for small loan companies in May.

While suggesting the government work out incentives to encourage more commercial banks to grant loans to SMEs, Yi called for the government to carry out a total reform of the banking sector's financing policies to meet SMEs' demands for financing services.

"The government should establish an SME-oriented system of financing services consisting of credit guarantee funds, a credit appraisal and rating tool, and a loan guarantee mechanism," said Yi. "Based on a sound system of financing services and improved and diversified financing channels, SMEs in China could finally get some relief."

Yu Fenghui, a financial analyst at Shihua International Financial Information Co. Ltd., told Beijing Review that the government must establish diversified financing channels, because it has been relying too heavily on local banking institutions, including city commercial banks and rural credit cooperatives, to solve the problem. SME lending companies, SME banks and SME cooperative financing institutions can diversify the financing channels, he said.

"Because they are quite familiar with local SMEs, these regional and local banks are able to simplify the loan procedures and meet SMEs' demands for urgent working capital loans," Yi added.

In the medium and long run, the government needs to support SMEs in other ways such as requiring commercial banks to guarantee a reasonable amount of loans to SMEs and encouraging them to grant loans to companies with good financial performances, said Tang Min, Deputy Secretary-General of the China Development Research Foundation. The government should make use of this opportunity to introduce some long-term reforms such as allowing private capital into the banking industry, he said.

"It will do no good for the SMEs' financing predicament if China's banking system continues to be dominated by state-owned banks and supplemented by foreign banks," said Tang. "China needs a group of private small loan firms targeting SMEs and serving the community."