China Watch Blog

China Watch Blog has learnt that a recent study by the Economic and Trade Commission of Wenzhou, Zhejiang Province, showed that only 57.4 percent of SMEs are able to meet their financing demands while more than 42.9 percent are under financial pressure.

About 88 percent of SMEs in Shenzhen are under financial strain, and 57 percent are encountering financing difficulties, the Southern Metropolis Daily reported, citing local government data.

“While further tightening liquidity, the government should also adopt a more flexible credit policy for SMEs, especially for those companies with good sustainability and prospects,” Zhang Wenkui, deputy director of the Enterprise Research Institute under the Development Research Center of the State Council, told the Xinhua News Agency, which was reported by the China Daily.

Analysts also warned that financing difficulties had forced many SMEs to turn to microlending, whose excessive rate led to many of the bankruptcies.

Recent research by the Administration for Industry and Commerce in Wenzhou showed that 23 microlending companies in the city have a total registered capital of 5.22 billion yuan ($ 809.14 million). They also have total bank loans of 2.51 billion yuan.

According to the China Economic Weekly, the annual rate of microlending in Zhejiang has reached 100 percent, compared with many SMEs’ turnover ratio of less than 10 percent a year.

Meanwhile, the National Bureau of Statistics released data showing that 88.7 percent of the 269 sampled enterprises in Shenzhen experienced a price hike in raw materials, with an average rise of 10 percent. The price of certain materials surged by as much as 60 percent, according to the data.

“I had to raise prices after mounting labor costs and rising costs for raw materials since last year, because of which I lost a lot of business. Many foreign companies have gotten used to our cheap prices, but that era has gone,” an owner of a clothing company in Wenzhou surnamed Ji was quoted as saying by the Global Times.

SMEs in China are also coming under growing pressure from rising labour costs, particularly those in the manufacturing sector, Lu Ting, China economist at Bank of America-Merrill Lynch in Hong Kong, told the Global Times.

According to government figures, a total of 27 provinces and cities raised their minimum salaries in 2010. In March, Guangdong raised its minimum monthly payment to 1,300 yuan from 1,030 yuan last year.

“China’s labour intensive SMEs will gradually become more capital intensive and more reliant on machines, which could substantially raise productivity,” Lu said, adding that the number of SMEs will gradually diminish.

China Watch Blog has learnt that the Ministry of Industry and Information Technology’s chief engineer and spokesman Zhu Honggren has acknowledged that based on the ministry’s studies, small- and medium-sized enterprises (SMEs) face serious financing difficulties after the government tightened liquidity, but rejected claims of a wave of SME bankruptcies.

However, the tightened credit policy, soaring raw material prices and rising labour costs do make lives for SMEs more difficult, and relevant departments and local governments need to actively help these companies for the sake of social stability, Zhu was quoted as saying in a China Daily report.

The report said that in the first four months of this year, 7,306 SMEs in Zhejiang cancelled their registrations, but the number of new SMEs registered was about 45,000.

Earlier this month, the SME Bureau of Guangdong Province released data showing that in the first quarter, the number of non State-owned businesses in the province increased by 3.5 percent year on year, and the number of domestic private firms increased by 14.7 percent.

“To say there has been a bankruptcy wave of SMEs is exaggerating,” Xu Biao, an economist with China Merchants Bank in Shenzhen, told the Global Times. “But the risk is still there if the difficulties facing those SMEs cannot be addressed, and the global economic recovery continues to slow down.”

In June, the People’s Bank of China raised the reserve ratio requirement by half a percentage point, forcing big banks to put aside 21.5 per cent of their deposits, a record high, and locking up funds that could otherwise be loaned out, thus fuelling inflation.

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China Watch Blog has learnt that China’s monthly surplus is expected to “widen” in the coming months though export growth will “decelerate”, probably causing some factories to close.

According to the Ministry of Commerce’s director-general of the ministry’s department of mechanical, electronic and high-technology industries, Zhang Ji, as domestic and global business conditions deteriorate, some manufacturers and exporters might struggle in the months ahead, with even some going bankrupt.

A China Daily report quoted the General Administration of Customs as saying that first-half exports increased by 24 percent year-on-year to $874.3 billion, compared with 35.2 percent growth during the same period of 2010.

Overall foreign trade expanded by 25.8 percent to $1.7 trillion.

Year-on-year export growth rates declined as the months passed during the first half, dropping to 17.9 percent in June from 37.7 percent in January.

“The export situation is getting worse, although there is still double-digit growth. The slowdown will continue in the second half,” said Zhang.

“Factors like rising costs for labor and raw materials, yuan appreciation and tighter monetary policy are and will be hurting Chinese exports.”

Yao Jian, spokesman for the ministry, said at a recent press briefing that the government will take steps to stabilize exports, including tax rebates, financing and credit insurance, in the belief that exports will slow during the rest of the year.

Media reports have said that some textile factories closed recently as operating pressures intensified.

The strains will squeeze their profits and “some of them will probably die out, but the majority will survive”, said Zhang.

“It is time for them to enhance their competitiveness.”

China Watch Blog has learnt that China’s yuan advanced to 6.4536 against USD on Thursday (July 21).

Renminbi

The Chinese currency Renminbi, or the yuan, gained 56 basis points to 6.4536 per U.S. dollar on Thursday, the highest since China started the exchange rate reform six years ago.

According to the China Foreign Exchange Trading system, in China’s foreign exchange spot market, the yuan is allowed to rise or fall by 0.5 percent from the central parity rate each trading day.

The central parity rate of the yuan against the U.S. dollar is based on a weighted average of prices before the opening of the market each business day.