China SMEs feeling the financial squeeze

An Expert's View about Domestic Credit Policy in China

Last updated: 27 Jun 2012

The higher one-year lending rate may be affecting larger makers more than smaller ones, but the difficulty in obtaining funding is adding to SMEs' cost pressures.

Small and midsize enterprises in China are feeling the proverbial noose closing down on them.

Acquiring financing from banks has always been difficult for SMEs, regardless of how high or low lending interest rates are. But because of recent challenges such as rising material costs and wages, it has become imperative for many such companies to invest in expanding their capability and boosting efficiency.

These efforts, however, require substantial capital, something most of them do not have. Difficulties in acquiring funding have resulted in shelved and postponed expansion plans. LED lighting products maker DEL Optoelectronics (Shenzhen) Co. Ltd, for instance, started building a new factory in Zibo, Shandong province, this year. But because the company cannot take out a bank loan, construction is likely to be postponed to ensure there is sufficient cash flow for other expenses.

Makers in labor-intensive industries such as textiles, furniture and lighters also need capital to upgrade their equipment to remain competitive. More than 30 percent of lighter manufacturers in Wenzhou, Zhejiang province, had to close down over the past two years due to insufficient funding and inability to innovate.

Wenzhou Small and Medium Enterprises Commerce president Zhou de Wen said most industries in the city traditionally enter their peak manufacturing season in Q2. Wen estimates 70 percent of companies in China would need to take out a loan to sustain operations, procure raw materials and boost capacity during these busy months. But as banks are unlikely to grant loans to SMEs, Zhou believes many such companies would have to fold in the next few months.

Because of the difficulty in obtaining a bank loan, most SMEs turn to private lenders for their funding needs. These creditors, however, slap on interest rates that are on average four times higher than bank rates. Some private lenders charge as much as 10 times more than what banks do.

Due to the exorbitant rate, SMEs typically apply for short-term loans of three or six months. To cover the high interest rate, some companies raise export prices. But this is not the preferred option as it comes with the risk of losing business. As an alternative measure, some exporters request a higher deposit from buyers while leaving quotes unchanged.

When China's central bank raised the interest rate on April 6 to 6.31 percent per annum, bigger companies were more concerned than most SMEs. Higher rates affect suppliers' development plans and their ability to procure raw materials. To a certain extent, it raises companies' operational costs and limits their expansion efforts. This is especially true for SOEs that have typically enjoyed low lending rates from banks.

To ease the cost pressure, some large suppliers are opting for a shorter loan period. Instead of a 90-day D/P, for instance, a few are going for 30 or 60-day terms.

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Posted: 21 September 2011, last updated 27 June 2012