Reports have flooded the media recently that tight monetary policies along with slowing economic growth have bankrupted many smaller firms in coastal regions.

According to the NSD survey, 72.45 percent of the small companies polled in the Pearl River Delta expect to break even or report modest losses in the next six months, and 3.29 percent expect to rack up painful losses or even suspend operations.

Meanwhile, the survey showed more expensive raw materials and labor cost inflation were major factors squeezing SMEs' profits. The raw material prices in most industries have surged 20-50 percent so far this year. The fabric costs of the apparel industry even jumped 30-80 percent. Also, wages of workers at small enterprises have soared 20-30 percent, and compensation for high-grade technicians has skyrocketed more than 100 percent.

Worse still, many small companies are receiving a deadly blow of decreasing export orders. According to results of the NSD survey, export orders for small companies in the Pearl River Delta have shrunk 30 percent compared with the same period last year as external demand weakened because of the European and U.S. debt crisis. Moreover, Chinese exporters are losing some market shares to low-cost manufacturers in Viet Nam and India. The domestic property market downturn also reduced demand for products like construction materials.

The shrinking orders have led to a falling operating rate for small firms. In the Pearl River Delta, the average operating rate for small companies has slid to 70.92 percent.

In Zhejiang, the situation is no less acute. The NSD survey showed 18.63 percent of polled small companies in the province had shut down, and only 40 percent were operating at more than 90 percent of capacity.

Zhou Dewen, head of the Wenzhou Small and Medium-sized Enterprises Promotion Association, said woes of export-oriented SMEs are attributed to fragile overseas markets, domestic inflation and appreciation of the yuan.

"The SMEs can surely tide over the hard time if they are supported with enough capital," he said.

Possible solutions

The NSD report said it is necessary now to materialize policies to help financially strained SMEs, such as establishing specialized financial institutions serving SMEs.

As black market lenders are more willing to extend credit to SMEs, it would also help if China allowed some underground banks to become legal lenders, and keep tight supervision over the informal lending market to fend off financial risks, said the report.

Banks avoid lending to SMEs they deem uncreditworthy. As a result, the report suggested the country strengthen efforts to improve the credit record system and make better use of the credit information of small enterprises.

The report said data for small firms reflects their operation and credit situations, but the information is not compiled in one database but is in the hands of different institutions. For example, the registration information is at industrial and commercial departments, the export information is held by customs, and their financial data stays with the banks. China is supposed to use that information to set up a credit system for small companies and evaluate their solvency.

The report also suggested collecting small firms' information from electricity, housing and environment protection departments to build a comprehensive database. That can give financial institutions easier access to information about small enterprises and help them provide targeted financial services for small firms.

Zhou Qiren, Director of the NSD, said global downside risks are mounting as the impact of the European and U.S. debt woes ripple throughout the world. But domestic inflation remains stubbornly high, so China's policymakers should not relax their monetary stance.

Zhou suggested the state take more targeted measures for small companies as soon as possible, such as tax reductions.

"Favorable tax policies can be more instrumental than monetary easing in supporting the suffering SMEs," said Zhou.

Financing Sources of Small Enterprises in Zhejiang and Guangdong Provinces

Friends, relatives and underground banks: 50 percent

Banks: 15 percent

Micro-credit firms and pawn firms: 7 percent

Rural credit cooperatives: 6 percent

No external source of capital: 22 percent

Financing Difficulties

Of the SMEs polled, 64 percent said banks favored larger companies;

57 percent said the financial products were inappropriate for smaller firms;

and 52 percent attributed the financing difficulties to the government's monetary tightening.

(Source: National School of Development of Peking University)