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China helps SMEs tide over difficulties
Latest Updated at 2008-December-8 10:55:10
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Tang Keshuai has been down in the dumps for months, ever since he began to feel the pinch of a constrictive money supply since mid March.

Tang, manager of Langyu Plastic and Rubber Co Ltd, a plastic and rubber product producer based in east China's Wenzhou, Zhejiang Province, used to settle his accounts with raw material suppliers once every four months, on the traditional Chinese lunar festivals of Dragon Boat, Mid Autumn and Spring Festival respectively

Two women make beds on a production line of the small private firm Nangang Shoemaking Factory in Foshan, Guangdong province. [China Daily]

But the rule was changed in mid March when raw material suppliers asked for accounts to be settled once each month. The change was not a good one. The original four-month span allowed Tang to have sufficient active money in his capital chain.

Capital pressure from upstream was one part of the story. Tang received smaller orders over the past months. In the first three quarters, Tang's company had only 3 million yuan (US$439,090) sales turnover, compared with 20 million yuan in 2007.

Tang had to dismiss 30 out of the 50 staff workers in August and transferred most orders to other plants, in order to lower production costs by 10 percent.

Tang was amazed to find it hard to transfer the orders. "I felt curious in the beginning why it was hard to seek processors, since orders became fewer on the market," said Tang. Longgang Town, home to Tang's company, currently has only about 100 plants of his type, while there were about 600 such plants a year ago.

In early June, Tang's company had almost exhausted its supply of cash, with only 200 yuan left in the account. Tang had nothing else to do except to driving his three-year-old daughter to the kindergarten. Two days later, he had to borrow money from his sister to "have meals". He continued for 10 days, and only pulled through the crisis when a Russian client remitted US$30,000 to his account.

"I was lucky to stick it out. But many companies have closed down because of a broken capital chain," said Tang.

During the current Wall Street-ignited global financial crisis, China's small and medium-sized enterprises (SME), largely labor-intensive and vulnerable to fluctuations in domestic and external demand, are affected most.

In the first half of 2008, 67,000 SMEs, each with sales income exceeding 5 million yuan, closed down, laying off more than 20 million employees, said the National Development and Reform Commission (NDRC).

The figure didn't include service industry firms and SMEs whose sales were less than 5 million yuan, since there were no authoritative figures available on those categories.

A migrant worker waits to board a train back to her hometown at a railway station after failing to find jobs in Dongguan, Guangdong province December 6, 2008. [Agencies]

Industry officials attributed the SME difficulties mainly to high raw material prices (leading to higher production and operation costs), financing difficulties, sharp export plunges and RMB appreciation.

Data from the China Association of Small and Medium-sized Enterprises (CASME) showed that compared with the second half of 2007, the country's SMEs have suffered a 20-percent rise in labor costs, an 11-to-15-percent rise in raw material costs, and a 40-percent rise in borrowing costs. But the average product ex-factory price is up only about 5 percent. These factors, accompanied by surging land prices and the appreciation of the RMB, have almost pushed SMEs to the limit.

SMEs are an important pillar of the Chinese economy. More than 95 percent of the 4.3 million SMEs are privately owned and many are in the export sector. They generate almost 60 percent of the nation's gross domestic product (GDP), 50 percent of tax revenues, 68 percent of exports and 75 percent of new jobs every year.

Fighting Financial Plight

Difficulty in raising capital has become a critical bottleneck to the growth of SMEs.

"A broken capital chain is deadlier than reduced orders," said Zhou Zhiming, board chairman of Shengda Clothes and Toy Corp, based in Dongguan City, south China's Guangdong Province. "We have to pay cash for raw materials these days. We may carry on with reduced orders. But without operating funds, we will die a sudden death."

SMEs like Zhou's largely have two channels to solve the pressing financing problem - taking loans with banks or borrowing loans on the black market at high rates.

"Bank loans are made under too rigid conditions. We have to hold in pledge our production lines and factory buildings, which are discounted in evaluation. We will wait for at least one month to get the loans," said Zhou.

Different from their overseas counterparts, which directly finance about 70 percent of their funds on the capital market, Chinese SMEs have only two percent of their funding needs met on the capital market. SMEs mainly depend on bank loans for the rest.

However, commercial banks, with quite strong risk-aversion sentiment, are cautious about lending to SMEs.

According to Li Zibin, head of CASME, SME loans made up only 15 percent of the total in the first half of this year. "It is obviously out of proportion."

Pudong Development Bank assistant general manager Xu Baolin said Chinese banks are actually paying close attention to the operation of SMEs. Under the current condition of financial tsunami, banks are inclined to extend loans to SMEs with markets and competitive products.

"We have to take aim at usurious loans from the black market. We might die faster with such greater risks," said Zhou.

The country has sought to help troubled SMEs with better access to loans.

China has now turned to an "active" fiscal policy and "moderately easy" monetary policy, a transition from earlier "prudent" fiscal and "tight" monetary policies that aimed at curbing inflation and averting economic overheating of earlier days.

"The new policies will further ease the financing difficulty of SMEs," said Yi Gang, vice governor of the People's Bank of China (PBOC), the central bank.

On Nov. 9, the State Council, the county's Cabinet, unveiled a 4-trillion-yuan stimulus package to stimulate domestic consumption and growth. One of the 10 major steps was to abolish loan ceilings on commercial lenders, partly to enhance financial support to SMEs.

The preferential policy came in the wake of a decision of the PBOC in August to raise this year's credit quota by 5 percent for national commercial banks and 10 percent for local commercial banks, which was aimed at easing the financial difficulties of SMEs.

In order to cool down the country's previous overheating economy and curb inflation, the PBOC strictly controlled its credit quota since the autumn of 2007.

Following canceling loan ceilings, the PBOC slashed the lending and deposit rates by a bigger-than-expected 1.08 percentage points as of Nov. 27, the largest cut since October 1997.

It was the fourth time the country cut lending rates since mid September, to reduce enterprises' financing costs and boost their investment optimism.

The PBOC also said, as of Dec. 5, it would lower the reserve requirement ratio by 1 percentage point at large banks and 2 percentage points at other banks. The reduced reserve requirement would free more money for banks to lend, pumping around 640 billion yuan into the system, said Jin Xin, an Everbright Securities analyst.

SMEs largely remain pessimistic over these measures.

"We still cannot solve the mortgage problem to satisfy commercial banks, although we starve for funds to maintain operation and upgrade equipment," said Deng Yakun, manager of Jiadi Architectural Decoration Engineering Co. Ltd. in north China's port city Tianjin.

"Our land is rented. We have no other worthy goods for mortgage. Since we cannot find credit guarantees, we cannot overcome this hurdle, no matter how many rounds the central bank cut interest rates," said Deng.

There are unsecured loan services from some commercial banks, i.e., free of guarantee and mortgage, but the interest rates might stand as high as 20 percent to disperse the risks to banks. "We simply cannot afford it," said Deng.

On Sept. 4, China's State Administration for Industry & Commerce allowed the use of enterprise equities as a pledge in applying for bank loans.

The new document - Measures for Equity Pledge Registration with Administration for Industry and Commerce, which took effect on Oct. 1, provides a new low-cost financing channel for money-hungry SMEs in the country.

According to the document, equities that may be used as pledges are confined to equities in limited liability companies and stock limited companies, excluding equities in stock limited companies already registered with securities registration and clearing organizations, and "equities with problems", that is to say, equities that have been frozen by the court.

Meanwhile, China has built a multi-level credit guarantee system for SMEs. China has established 3,366 credit guarantee institutions for SMEs with an accumulative guarantee fund amounting to 805 billion yuan, said Zheng Xin, an official with the National Development and Reform Commission (NDRC).

These credit guarantee institutions have completed credit evaluation and credit information collection on more than 200,000 SMEs, helping insured enterprises to add sales income totaling 342.5 billion yuan, increase profits and taxes of 26.8 billion yuan, and to offer 1.5 million new employment posts.

PBOC will also propel SME-prone financial innovations to ease the fund shortage of SMEs this year, said Yi Gang, vice governor of the bank recently.

According to Yi, financing products for non-financial corporations such as corporate bonds, short-term financing bills and mid-term notes will be actively promoted in the future so as to enlarge the financing channels of SMEs.

To add more credit loans to SMEs, China has piloted small-sum loan companies tailored for SMEs.

In May, China Banking Regulatory Commission and PBOC jointly issued guidelines for piloting small-sum loan companies across the country.

After three months preparation, east China's Shanghai has approved the setting up of 17 small-sum loan companies in 10 suburb districts under the city. Three such companies have gone into business in Baoshan District, Songjiang District and Puding New District respectively.

Li Yueru, general manager of the Baolian small-sum loan company in Baoshan District, the first going into operation on Nov. 15, has received 400 visitors from all walks of life in two weeks.

The private business sponsored loan company, with a registered capital of 50 million yuan, is a lender to provide small-sum loans mainly to small businesses and farmers. It is not permitted to take public deposits and its capital sources are mainly from shareholders, donations and finances from banks.

"We charge interest at a rate ranging from 0.9 to 4 times that fixed by the central bank for same grade loan services in commercial banks. Since the interest rates are much lower than the black market, we are welcomed by SMEs. Our clients largely come from the manufacturing and financial investment sectors, and half of them come from other districts or other cities," said Li.

Meanwhile, CASME has initiated a 3-billion-yuan venture investment fund as a step to help the country's SMEs raise capital, the body said on Nov. 24. The fund will be established by the end of this year.

CASME will also issue an SME corporate bond with the northeastern Liaoning provincial government. It will found a bank with a planned registered capital of 10 billion yuan, according to CASME.

"Upon its establishment, the bank will provide loans only for SMEs. Companies may get as much as 5 million yuan each for their investment and development," said CASME head Li Zibin without specifying when the bank would open.

Officials propose SMEs to adjust the credit structure to survive the financing difficulty. To promote the development of the bond market and direct financing either abroad or on the SMEs board in Shenzhen bourse, were key measures to ease the pressure, said Liu He, deputy director of the Office for the Central Leading Group on Economic and Financial Affairs.

Restructuring

Apart from improving access to loans, the Chinese Government has taken other measures to support SMEs. For example, it has raised export tax rebates three times so far during the second half.

China raised tax rebates on Nov. 1 for 3,486 items ranging from labor intensive industries such as textiles, garments, toys, hi-tech and high-added-value sectors like anti-AIDS drugs.

Wang Liming, director general of the SMEs department of the Ministry of Industry and Information Technology (MIIT), said the country might further raise the tax rebates rate by one percentage point for some labor-intensive industries in the near future to help them cope with shrinking profit margins because of slacking market demands, the yuan's appreciation and rising production costs.

In addition to all this support, the government is encouraging SMEs to accelerate industrial restructuring and innovation.

"The financial crisis has exposed some interior problems with our enterprises," said Li Huiwu, deputy director of south China's Guangdong Provincial Development Research Center.

Guangdong export markets are largely destined to Europe and the United States, with the United States accounting for nearly 40 percent of the market shares. Export oriented processing businesses amount to 70 percent of the province businesses. That explains why Guangdong suffers most heavily in the country from the US-born financial crisis, said Li.

According to Le Zheng, president of Shenzhen Municipal Academy of Social Sciences, Guangdong enterprises differentiate among themselves in the face of the financial crisis.

"One third enterprises are barely affected by the lash and even expand their market shares, because of industrial restructuring and technological innovation," said Le Zheng.

"Another one third of enterprises are operating normally and will survive the crisis by shrinking frontlines and improving production efficiency."

"The remaining one third of enterprises might be eliminated in the crisis, because of small business scales, deficient funds, brands and technologies," said Le Zheng.

According to Li Huiqin, party chief of Houjie Town, Dongguan City, a major exporting base in Guangdong, a fairly large proportion of the processing businesses in the Pearl River Delta, including Dongguan, were transferred from Hong Kong and Taiwan in the 1980s.

It is a miracle that these out-dated, low-end commodity producers have survived for 30 years, because of low labor and raw material costs on the Chinese mainland. It is time to upgrade the industrial structure of the Pearl River Delta against the backdrop of the financial crisis.

Under the current heavy pressures, many enterprises have started to reform themselves.

Seeing its export orders cut by 30 percent, Dongguan Nanxing Plastic Co. Ltd., which was established in Hong Kong in 1957, reshuffled its marketing plan to expand the Chinese mainland market proportion from 10 percent to 30 percent.

The strategic reshuffle is what the business, a pace-setter in designing and producing 3,000 tonnes of plastic packing bags a month and exporting them to Europe and the United States, needed, said Wang Jianhua, marketing manager of the 1,000-employee company.

Da'afu Baby Carriers Co. Ltd., a 500-member business based in east China's Shanghai Municipality, is also confident of pulling through the crisis.

"SMEs like ours cannot compete with big enterprises. We are not competitive in simply expanding outputs," said Yuan Fuxiang, board chairman of the company. "But we can focus on producing high-grade products with limited market demands, such as orders of two to three containers in volume, which big enterprises will not do. This is where our competitiveness lies."

These days, the company has cut most of its 100-product mix and focused only on three leading product varieties of game beds, umbrella vehicles and cloth beds. The company makes greater profits by improving products with higher added values, said Yuan Fuxiang, with more than 400 independent intellectual properties at hand.

"The export sector needs to make an overall industrial restructuring," said Xu Quanning, secretary general of Shanghai Toy Industrial Association.

According to Xu, only 20 percent of Chinese toy exporters have independent intellectual properties, which earn 20 percent to 30 percent profits. In contrast, 80 percent of toy makers are mere processing businesses, without any brands or core technologies, thus earning only 5 percent to 8 percent profits. "The latter enterprises suffer most in this financial crisis," said Xu.

"These enterprises must save themselves by industrial restructuring, despite the help of all sorts of preferential policies from the government," said Xu.

Industrial officials estimate the fourth quarter of this year and the first quarter of next year will be the most severe periods for Chinese SMEs.

"Within three to five months, Chinese SMEs will feel the relief from the nation's economic stimulus package as long as they hold onto their capital chain at present," said Li Zibin, CASME head.

"The world has six billion people and there is a market for 6 billion pairs of shoes. So long as we hold on, we will enjoy the market opportunities," said Teng Xingbiao, board chairman of east China's Wenzhou Fuluomi Shoes Co. Ltd., encouraging his more than 1,000 staff workers these days.

Teng's company produces 240,000 pairs of children shoes a month and exports them to Europe, the United States and Australia. The firm joyously received five foreign buyers in recent days. "We are building one more production line on the basis of the existing three. We are to meet difficulties head-on."

"We are also meeting pressures from rising costs and reduced orders. But each month, we will develop more than 100 models of shoes," said Teng. "We are to rely on product development and management to improve product quality and win the market."

Editor: Yan

By: Source: China View website

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