China Watch Blog

China Watch Blog has learnt that China’s small and micro enterprises are still struggling with lackluster business, and most badly need long-term rather than short-term loans, said a report based on a survey released on Saturday at the Boao Forum for Asia.

Of the 1,000 small and micro enterprises surveyed across China, 56.7 percent said their order numbers declined or stayed flat last year compared with 2011, and 57.7 percent said profit dropped or kept flat in 2012. In addition, 49.9 percent complained about an unstable workforce.

One-third of SMEs need medium- and long-term loans to upgrade their equipment or invest in new products, the survey found, yet 63.3 percent of loans they got were short-term, less than a year.

“This stands in conflict with the fact that driven by fiercer competition, 39.3 percent of SMEs have considered improving their product quality, 43.9 percent of SMEs have considered extending their product chain and 27.7 percent have considered upgrading their technology,” said Ba Shusong, a banking expert with the Development Research Center under the State Council, who led the research.

A revelation of the report is that though 66.7 percent of SMEs regard bank loans as a primary financing measure, 62.1 percent of them do not now have them.

Yao Wang, executive president of the Research Institute of the Boao Forum for Asia, said SMEs have little expectation of getting bank loans.

“The survey showed most SMEs don’t have bank loans. They don’t expect to get a loan from big banks. This is pathetic,” Yao said.

In consequence, SMEs sought financing from family members and friends – 24.3 percent of micro enterprises and 7.5 percent of small enterprises. They are much less aware of the multiple new financing methods: 38.8 percent of SMEs, for example, do not know about intangible assets mortgages.

China Watch Blog has learnt that small- and medium-sized enterprises in the western region of China were more vulnerable than those on the east coast given the deteriorating external market and tightening internal environment last year.

Bank of Communications and Fudan University jointly announced today the growth index of SMEs in the second half of 2011, saying the companies expanded slower at 96.91. A figure above 100 means expansion and a reading below 100 indicates contraction, the China Daily reported.

The report noted different patterns of business development in different regions. Companies in the south, east and central regions expanded slightly in the second half of last year. The expansion was attributed to favorable financing, tax rate, and government support, as well as the regional economic advancement gained over the years.

The northeast region stayed level while western territories saw a significant contraction among small businesses, which registered a reading as low as 85.12.

“The western areas lag relatively in economic development. The SMEs there are less profitable than competitors in the coastal areas. They have been severely impacted by the sluggish economy in general,” the report said.

A sub-index suggested that SMEs were more adept at countering risk despite higher raw material and labor costs, a bigger tax burden, and environment constraints.

The report said the confidence index of 98.24, although below 100, was much better than other sub-indices, indicating entrepreneurs are not too pessimistic about market prospects.

China Watch Blog has learnt that small and medium-sized enterprises (SMEs) are unlikely to close on a large scale this year, as they will receive 3 billion yuan ($475.6 million) annually in central government support for the next five years.

According to the Ministry of Industry and Information Technology, since the first quarter of 2010, SMEs have faced such problems as high production and labor costs and an unfavorable international environment, and export-driven SMEs have been hurt by the weak global economy.

China Daily reported the State Council as urging local governments to offer support for the development of smaller companies.

On Feb 1, the council discussed the issue in an executive meeting and announced that the government would further support SMEs by establishing a 15-billion-yuan fund.

Small companies “serve as a significant channel for creating jobs, a major platform for the growth of entrepreneurship and an important force for scientific innovation”, according to a statement released on Feb 1 and reported by the Xinhua News Agency after the State Council executive meeting presided over by Premier Wen Jiabao.

“The Ministry of Finance will allocate 3 billion yuan every year over the next five years and the State Council will release policy documents on further development of SMEs in the near future,” said Zhu Hongren, spokesman and chief engineer at the industry and information technology ministry.

The ministry noted that exports had cooled, and industries’ export shipments had increased by just 16.6 percent last year, slower than in previous years.

China Watch Blog has learnt that South China’s Guangdong province has announced a set of new policies to support cash-trapped small firms which play a vital role in creating jobs in the country’s largest provincial-level economy.

The new policies, which were published on the provincial government’s official website on Thursday, came as small- and medium-sized enterprises (SMEs) face mounting pressures caused by cooling export growth, rising costs and financing difficulties.

According to the online statement, the government will set up several development funds to build financing service systems for small companies, offer them support for scientific innovation and help them develop markets.

The province will also offer tax breaks and support some small firms to seek financing by becoming listed on the stock market, said the statement.

The statement also promised incentives for banks offering credit to small firms and urged them to establish an credit evaluation system suitable for small- and medium- sized firms.

Guangdong’s announcement came after the State Council said earlier this week that the government will support small companies with a 15 billion-yuan (US$2.4 billion) fund and preferential tax policies.

Small- and medium-sized enterprises create about 80 percent of the country’s jobs, but they usually have difficulty in securing bank loans, as Chinese banks prefer to lend to larger companies, especially state-owned enterprises.

China Watch Blog has learnt that a financial taskforce has been sent to probe private lending in Wenzhou in Zhejiang Province, as companies and their bosses continue to face ruin.

China Daily quoted government sources as saying that teams will look into why the majority of small and medium-sized enterprises (SMEs) are sailing into financial dire straits, with some company bosses going missing or even committing suicide due to the pressures of repaying loans to underground banks.

“We’ve got 48 underwriting firms to provide bank loan services to SMEs with lowered interests and commission fees, and a series of activities will be held between banks and enterprises to ease their difficulties,” said Yu Zhongping, director of Wenzhou Economic and Information Commission.

He said more measures will also be carried out to monitor and control the risks of private lending. In addition, the city government has organized 25 teams to work with 25 banking organizations to examine the lending system for SMEs to prevent a collapse of the money chain.

“We aim to regulate the private financial market by organizing and expanding more authorized financial companies offering loans in the near future,” said Zhang Zhenyu, Wenzhou’s finance director.

According to official statistics, the amount of private capital in Wenzhou exceeds 600 billion yuan ($93.7 billion), with private loans accounting for 110 billion yuan.

China Watch Blog has learnt that in face of the severe survival predicaments, China issued its first nation-level special plan for small and medium-sized enterprises last Thursday.

According to NewsGD.com, the Growth Plan for SMEs in the 12th Five-Year Program period (2011-2015) was released by the Ministry of Industry and Information Technology at the 8th China International SME Fair held in Guangzhou.

A group of key projects and action plan will be launched, including building the public service platform network and improving SMEs’ capacity, according to Zhu Hongren, chief engineer at Ministry of Industry and Information Technology.

According to the plan, the number of China’s SMEs will grow steadily in the next five years with an average annual growth rate of 8 percent.

There are five primary missions in the plan. First, to improve the capacity of establishing business and creating jobs; Second, to optimize the structure of SMEs; Third, to boost the development of the “new, distinctive, specialized and sophisticated” industries and the industrial clusters; Fourth, to upgrade enterprise management level; Fifth, to refine the service system of SMEs.

SMEs contribute to 60 percent of China’s industrial output and create 80 percent of the country’s jobs.

They are experiencing the greatest hardships this year and are at great risk of debt disputes. Shortages of electricity, capital and labor have led them to this predicament, and the soaring costs have made things worse.

Among the 60 small businesses and 10 industry associations interviewed by Xinhua in July in the costal provinces of Zhejiang, Fujian and Guangdong, as many as eight out of ten companies said they are suffering from operating difficulties more than ever before.

Thinner profits have made business owners reluctant to take orders, while a labor shortage, tightened electricity and money supply are impeding production. Many small businesses said they are faced with “the toughest time in the history.”

The Chinese government has made substantial efforts to support SMEs while simultaneously tightening its monetary stance to curb inflation this year.

To square the circle of curbing inflation while sustaining economic growth, the central bank and the National Development and Reform Commission have highlighted the necessity of encouraging financial institutions to support small and medium-sized enterprises while controlling total credit.

Hopefully, this newly released growth plan will get SMEs out of the predicaments and help SMEs to establish a modern enterprise system and credit system.

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 China’s bank regulator will ease its controls on bad loans incurred by smaller Chinese firms to encourage more banks to lend to them.

China wants to channel more bank lending towards its small- and medium-sized enterprises (SMEs), which usually face difficulties obtaining loans from banks that prefer the safety of lending to large state companies, the China Daily reported.

“We will appropriately loosen the non-performing loan ratio control for smaller firms,” the China Banking Regulatory Commission said in a statement posted on its website late on Thursday.

Although the commission did not elaborate on the extent to which it would loosen its control over sour loans, we wonder what kind of criteria the banks will impose and what criteria they will loosen. It will be quite interesting to see what happens.

But the Comission said the non-performing loan ratio for smaller firms dropped to 3.3 percent at the end of December, down from 5.3 percent at the start of 2010.

It also said that provisions made by Chinese banks for bad loans hit 218 percent in December, up 63 percentage points from the start of last year.

The regulator said it wants to ensure that loans to smaller firms grow as fast as the pace of growth in total new loans this year.

It said it would give banks incentives to sell new financial products to smaller firms and improve their credit guarantee system for these companies.

The commission said it would help smaller firms get easier access to financial services by simplifying the application process.

New loans to SMEs rose 35 percent in 2010 from the previous year, outstripping 25 percent growth in total new loans for the year, the regulator said.

It said outstanding loans to smaller firms hit 7.27 trillion yuan, or 24 percent of total loans issued to companies, but it did not provide a comparative figure.

China Watch Blog has learnt that the Hong Kong Government plans to inject an additional HK$1 billion into the SME Export Marketing and SME Development Funds next year.

Delivering his Policy Address this morning, Chief Executive Donald Tsang said the move will encourage small and medium enterprises’ participation in export promotion activities and enhance their competitiveness.

To offer more support to SMEs, the Mortgage Corporation is also exploring the establishment of a market-oriented loan guarantee scheme to provide a sustainable platform for obtaining credit, he added.

Strengthening financial co-operation with the Mainland is vital for Hong Kong’s financial services, he said, adding these should be positioned and developed in a way that will increase the city’s contribution to promoting the modernisation of the Mainland’s financial system, particularly the internationalisation of the renminbi and the increased convertibility of the Mainland’s capital account in a gradual and orderly manner.

China Watch Blog has learnt that most Chinese small- and medium-sized enterprises (SMEs) choose to conduct the majority of their business in the Asia-Pacific region.

This indicates a renewed confidence in economic growth across the region, according to a UPS Asia Business Monitor report released on Monday.

According to the report, 78 percent of Chinese SMEs currently conduct their business in the Asia-Pacific, compared to 6 percent in the United States and 10 percent in Europe.

More than 70 percent of the surveyed enterprises showed their faith in the region’s potential by listing the Asia-Pacific as the top prospect for trade growth and business expansion over the next three years.

The UPS Asia Business Monitor is an annual survey of SME decision-makers’ sentiments, issues, concerns and opportunities across the region. This year’s survey covered 1,350 SMEs across 13 markets, including China, Australia, India, Indonesia, Japan, South Korea, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

“This year’s survey reflects a strong belief in the continued global economic recovery, especially in Asia,” Richard Loi, president of UPS China, was quoted as saying in a China Daily report.

He said the growth potential of the region can be reflected by an export volume growth of more than 40 percent in China in the first two quarters of 2010.

Survey respondents were more optimistic on the prospects for continued economic recovery, with 65 percent believing their company’s prospects would be much better in 2010 than in 2009.

Furthermore, more than half of the respondents in China anticipate positive economic growth prospects for the region, and another 34 percent expect the economic growth prospects to stay the same as last year. Only 12 percent of SMEs expect the economy to decline this year, which compares well with last year’s figure of 61 percent.

According to the survey, nearly half of Chinese SMEs indicated they would “increase their workforce by up to or more than 10 percent” in 2010, compared with 35 percent in 2009.