BEIJING - Premier Wen Jiabao has urged stronger financial support for China's small businesses, as the country is currently walking a fine line between fighting inflation and maintaining growth.

Small enterprises should be a priority for bank credit support and enjoy more preferential tax policies, Wen said during visits to east China's economic hub of Zhejiang province on Monday and Tuesday.

Banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit, the premier said.

He also said bank support for small businesses must follow market principles and avoid too much administrative intervention in order to check moral hazards.

His remarks came in light of tightening monetary policies that have bitten into China's small businesses. These companies create 80 percent of the country jobs, but have difficulty securing bank loans, as Chinese banks prefer to lend to larger companies.

Outstanding loans to small firms grew 26.6 percent year-on-year to hit 9.85 trillion yuan (1.55 trillion U.S. dollars) at the end of July, rising faster than the total outstanding loans of Chinese banks, said Xiao Yuanqi, an official from the China Banking Regulatory Commission (CBRC), late last month.

But the situation remains grim, as some cash-strapped companies have shut down and others have resorted to the private lending market, which operates outside of the banking industry and typically features higher interest rates.

Wen said private lending activities should be better guided and regulated in order to play a positive role in boosting the country's economy.

"Effective measures should be taken to contain the trend of usury, crack down on illegal fundraising and properly handle the problems of collateral and capital shortage in order to prevent risks from spreading and evolving on a regional scale," he said.

In Zhejiang's city of Wenzhou, one-fifth of the city's 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city's council for small and mid-sized enterprises.

During his tour in Zhejiang, Wen visited several enterprises in the cities of Wenzhou and Shaoxing and met with local business leaders.

"Small businesses play an irreplaceable role in creating jobs and boosting economic growth," said Wen. "It is of overall and strategic significance to support their development."

China's economy is moving in the direction expected by the government, Wen said. He added that its fundamentals are sound, with a stable economic and financial system and a relatively good employment situation, he said.

"We should maintain the continuity and stability of our policies while giving them more foresight, relevance and flexibility," the premier said.

China has made stabilizing prices a top priority in its macro-economic controls while trying to avoid harming the growth of the world's second-largest economy with its tightened monetary policies.

The CBRC has encouraged banks to set up special operations to ease small firms' financial difficulties and carry out differentiated NPL supervision on loans to small enterprises.

In June, the CBRC said that loans of less than 5 million yuan granted to small companies will not be subject to loan-to-deposit ratio supervision.

Xiao, who is in charge of financial services for small enterprises at the CBRC, said last month that Chinese banks can tolerate an NPL ratio of 5 percent for small businesses, much higher than the current average NPL ratio of 2 percent.

Wu Xianting, deputy director of the PBOC's financial market department, said in August that the number of bankrupt companies in Guangdong and Zhejiang provinces, where many small firms are based, was much lower than two years ago during the global financial crisis.

Higher prices for coal, electricity and other raw materials, as well as rising labor and financing costs, resulted in the closures, Wu said in an online interview.

China saw its consumer price index (CPI), a main gauge of inflation, rise 6.2 percent year-on-year in August, far above the government's four-percent target for the year.

The People's Bank of China (PBOC), or China's central bank, has raised its benchmark interest rate three times this year and increased its reserve requirement ratio six times during the same period.