POWER SHORTAGE: A business owner stands next to a diesel generator at his workshop in Shangyu, Zhejiang Province. His umbrella company now relies on the generator to meet part of its electricity needs (JU ZONGHUAN)

Comprehensive borrowing costs of SMEs in China increased more than 13 percent in the first four months this year, said a recent report by the MIIT. The dire situation for SMEs is expected to continue as policy makers pledge to keep the tightening measures steady.

The financing bottleneck has forced many Zhejiang SMEs to turn to underground banks, triggering higher debt risks. A recent Wenzhou Financial Services Office survey of over 350 local enterprises showed polled companies were relying on underground banks for 16 percent of their operational capital at the end of March, 6 percentage points higher than a year ago.

Among the crisis-stricken SMEs is the Zhenqing Optical Co. Ltd., an eyeglass manufacturer based in Wenzhou.

"The company is struggling to make ends meet as raw material prices head north," said Ye Jianqing, chairman and founder of the company.

"I have been in the business for 15 years and encountered a lot of obstacles. But this is the first time the crisis has escalated to such an extent," Ye said. "Many other business owners in Wenzhou have given up and plunged into real estate and capital market speculation."

Qian Ming, Deputy General Manager of Zhejiang Chenghui Textile Co. Ltd., said the lack of access to bank credit was the biggest problem.

"As costs inflation worsens, the company has received a heavy blow this year," he said.

Qian said he applied for bank loans to keep company operations afloat, but after two months of waiting he eventually received a rejection letter from the bank.

"Loans from underground banks are easier to obtain, but the interest rates are amazingly high," he said. "Without needed capital, we can hardly survive, not to mention expand."

Even larger companies have felt the pinch. "We are considering plans to close poorly performing outlets and use the limited capital to focus on profitable products," said Zheng Julin, Chairman of Zhejiang Xinhua Group, a manufacturer of specialty paper based in Hangzhou, capital of Zhejiang.

A helping hand

SMEs account for 99 percent of Chinese enterprises and around 80 percent of job creation, and contribute more than 60 percent to the country's GDP, said the National Bureau of Statistics. Policy incentives to heal the woes of SMEs are already underway.

On June 7, 2011, the CBRC announced new measures to soothe their thirst for capital.

The CBRC said a loan of less than 5 million yuan ($771,000) to a small enterprise could be viewed as retail lending, and will not be subject to loan-to-deposit ratio supervision. Commercial banks will be allowed to tolerate higher bad loans to small companies.

In addition, banks will be encouraged to open more branches if their growth in small enterprise loans outpaces that of overall loans for two straight years. Those banks whose outstanding small enterprise loans meet a certain proportion of their total corporate loans will be given priority to issue bonds and the raised financing must be used to distribute loans to small businesses.

By the end of this April, China's outstanding loans to small businesses totaled 9.45 trillion yuan ($1.45 trillion), rising 7.1 percent from December 2010, 0.8 percentage points faster than the overall loans.

Lian Ping, chief economist at the Bank of Communications, said banks are wary of lending to small companies due to concerns over bad debt risks.

"These policies came at the right time, and they are expected to help cash-hungry companies tap funding sources," said Lian.

Banks can also generate handsome returns from small enterprise loans due to higher interest rates and then adequately cover the risks, he said.

Meanwhile, the country has handed out generous incentives for SMEs, such as tax waivers, and accelerated development of micro-credit. There were 2,614 micro-credit companies in China in 2010, soaring from 1,334 in 2009, said the central bank.

The growth enterprise board ChiNext was also launched in October 2009, raising 15.5 billion yuan ($2.4 billion) for the first 28 listed technology and innovation-driven startup companies.

Zhao Xijun, Deputy Director of the Financial and Securities Institute at the Renmin University of China, suggested improving the credit guarantee system in China and broadening financing channels of SMEs, such as private equity funds, bond auctions, stock listing and pawns.

Yao Jingyuan, chief economist with the National Bureau of Statistics, said a more permanent solution is to allow private investors into the financial industry, especially smaller financial institutions like rural banks.

"The enterprises must increase their account transparency and provide timely and reliable financial reporting to demonstrate their solvency," said Chen Naixing, Director of the Research Center for Small and Medium Enterprise at the Chinese Academy of Social Sciences.