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UPDATED: October 24, 2011 NO. 43 OCTOBER 27, 2011
A Helping Hand
Soothing the financial woes for smaller businesses in China proves challenging when banks refuse to loan

IMPLEMENTATION FIRST: Workers of Zhejiang Feiyue Group, a private knitting machine manufacturer in Taizhou, Zhejiang Province, work on an assembly line (WANG DINGCHANG)

Embattled small and medium-sized enterprises (SMEs) should be able to find their way out of the current financial quagmire as long as they receive sufficient financial support, said a recent report of the National School of Development (NSD) of Peking University.

But these hopes remain distant dreams since obtaining bank loans has proven all but impossible for many of China's SMEs.

Zhejiang and Guangdong provinces are home to numerous SMEs, and the acute financial difficulties facing SMEs there show that China still has ground to cover to remove financing bottlenecks choking the development of smaller firms.

Implementation matters

As early as 2000, the Chinese Government released policies to encourage commercial banks to strengthen services to SMEs.

In 2002, China promulgated the Law on Promotion of Small and Medium-sized Enterprises, requiring banks and credit cooperatives to enhance credit support for SMEs and develop financial products targeting these enterprises.

In 2005, the State Council released a set of policies encouraging policy banks and strengthening financial services like transferred loans and guaranteed loans to SMEs.

In 2010, the government required state-owned commercial banks and shareholding banks to set up departments focused on financial services for SMEs, improve their credit business system for SMEs, and increase the proportion and scale of SME credit.

However, it seems that those measures have yet to be properly implemented. The NSD recently conducted a survey of more than 3,000 SMEs in Zhejiang and Guangdong and found that only 10-15 percent of the respondents had received bank loans.

Zhou Qiren, Director of the NSD, said many smaller companies tried to purchase advanced equipment to upgrade their technologies and productivity in response to the ongoing downturn.

"But that requires a huge amount of funds in far excess of their own capital," said Zhou. "Meanwhile, the threshold for SME loans is more demanding."

Many banks said they have attached significant importance to SMEs, but actually they still consider vulnerable smaller businesses larger risks and fear that they will get stuck with bad debts, he said.

"During the investigation, we have found many cases of crisis-stricken SMEs being brought back to life and health by an injection of credit capital," he said.

In addition, 76 percent of the surveyed SMEs needed less than 1 million yuan ($157,480). Nevertheless, banks still shut their doors to them, added Zhou.

"Although the government has spared no effort to push for better financing support to SMEs, commercial banks remain less willing to follow the call due to their risk-averse business model," said the NSD report.

Because of a lack of access to bank credit, many entrepreneurs had to turn to their friends and relatives. The NSD survey showed that 31 percent of the respondents relied on friends and relatives as the largest source of capital.

Worse still, some engulfed SMEs borrowed from underground banks at surprisingly high interest rates, triggering serious debt risks. The NSD report said interest rates of underground banks in Zhejiang Province mostly range from 24-36 percent. Some unscrupulous underground banks even lend at interest rates of 48-60 percent. Such intolerable financing costs pushed many SMEs into deeper problems, and some insolvent companies eventually went bankrupt.

Wenzhou accounts for less than 1 percent of the national gross domestic product and reportedly has more than 400,000 mostly small firms that rely heavily on the informal market for financing.

"But the size of informal lending is relatively small and the concerns about its direct impact on the formal banking sector and the economy are exaggerated," said Wang Tao, chief China economist with the UBS. "The bigger risks are credit withdrawal in both the formal and informal lending market and contagion."

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