HONG KONG (Reuters Breakingviews) - Hong Kong is on the brink of a mom-and-pop shop recession. Four months of protests have hit small business owners hard, and they generate 45% of local jobs. Regulators want banks to help, but tiny companies are risky borrowers, and lenders' enthusiasm is rightly tempered by compliance concerns.

Big companies can reduce the impact of local unrest by having overseas operations; laundromats, restaurants and apartment lettings agencies don’t have that option. There were over 330,000 small and medium enterprises in Hong Kong as of June, with 1.3 million employees on payroll. Putting them on the street would amplify political and economic stress.

Officials are concerned. In August they rolled out a fiscal relief package; this week the Hong Kong Monetary Authority cut the amount of capital banks have to keep locked up, freeing up to $38 billion for lending to struggling small businesses. Financial Secretary Paul Chan called on developers to voluntarily lower rents; the subway system is doing so already for stores in and around its stations.

Unfortunately big banks like HSBC aren’t well suited to petty entrepreneurs. Along with affiliate Hang Seng, that UK-based lender accounts for one-third of the city’s loans, according to an October report by Morgan Stanley. But small businesses, especially those with high cash turnover, make for risky clients. HSBC has already paid big fines in the past to the U.S. Department of Justice for money laundering.

Hong Kong has been trying to help – partly because tech startups too have been scared away by a lack of finance. The HKMA now claims only one in 20 applications for a bank account are rejected, from one in 10 back in 2016. But loans can still be hard to come by. The new credit application failure rate shot up 10 percentage points in the second quarter to 13%.

There’s room for improvement. Hong Kong has only just started dabbling in digital banks. At a push, the government could cut already-low tax rates further, or give handouts such as rent subsidies. What the business community really needs is an end to the protests that scared customers away in the first place. But as it is, distress in the small business community risks making social problems even worse.

CONTEXT NEWS

- On Oct. 16 the Hong Kong Monetary Authority announced that nine major banks had agreed to special support measures to help struggling small- and medium-sized enterprises.

- The HKMA cut the so-called countercyclical capital buffer requirement for local banks to 2% from 2.5% on Oct. 14. The move will release between HK$200 billion and HK$300 billion into the banking system, according to HKMA chief Eddie Yue, making it easier for lenders to extend credit to struggling businesses.

(Editing by John Foley and Katrina Hamlin)

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