In years past, Cheng Cunwang – an organic farmer who has been cultivating crops for more than a decade on the outskirts of Beijing – would have had few options for financing outside China’s massive state institutions.

Dealing with the paperwork those giants require for potential borrowers, a process Cheng sees as a waste of time and effort, is a considerable hurdle compared to the smoother, more streamlined operations of smaller banks and fintech firms.

A loan of 1 million yuan (US$136,651) would be more than enough for his agricultural firm to maintain a healthy cash flow, Cheng said, and that sum is quickly accessible via a platform like MYbank, the online bank backed by Ant Group.

“As a small firm, we want financial services that are flexible and fast,” he said.

While demand from small businesses has driven the rise of financial technology companies in China, the emerging industry’s expansion may be on pause as Beijing has pledged to scrutinise them more carefully to soothe worries of systemic risk.

As of the end of last year, 346 of the over 4,500 financial institutions in China – all medium or small – were listed as high-risk, according to the 2022 China Financial Stability Report issued by the central bank.

“In recent years, it’s often medium and small banks that have reported bad debts, and some simply collapsed. They have accumulated a number of problems and may need to slow down a bit,” Lian said.

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“But in the long run, I think it’s inappropriate to give all the work to large banks. The financial system should be a comprehensive one, instead of being concentrated on a few participants.”

Small companies, which contribute to about 60 per cent of China’s gross domestic product and 80 per cent of urban jobs, have struggled to access financing at affordable cost for decades.

Online financing and smaller banks have provided a partial solution, but bigger institutions have also been pushed by the authorities to solve the long-standing issue.

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Lin Xiaojing, a client manager at Zhejiang Tailong Commercial Bank, a private bank targeting small and micro-sized companies, said she has seen increasing competition from larger banks since the pandemic, driven by mandates from regulators.

“For small borrowers there are options besides banks, like private lending and online platforms, but they’re often expensive and bad for personal credit,” she said.

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As part of its efforts to revive private businesses and jump-start a slow recovery, the central government encouraged financial institutions in August to offer tailored support to some small and medium-sized enterprises (SME) in key sectors.

They were urged to offer diversified products, including foreign exchange hedging, to meet the needs of SMEs, according to a statement jointly issued by five ministries.

The recent policy changes in favour of big banks will make them more stable and resilient institutions, analysts with China International Capital Corporation – a partially state-owned financial services provider – said in a research note on Wednesday.

For medium and small ones, they said, those which can “differentiate themselves” in multiple areas will have greater sustainability down the line. Fintech, green finance, inclusive finance, pension finance and digital finance were all mentioned as zones of interest.

Cheng, the Beijing farmer, said he pays an interest rate of over 10 per cent for loans from fintech firms, notably higher than what leading state-owned banks offer, often falling between 4 and 6 per cent.

But he would rather choose the former, he said, as “it’s convenient and easy to get.”

“Getting loans from big banks requires very complicated procedures. Small borrowers would benefit a lot if they can issue loans based on credit instead of mortgages.”