October 10, The local government in eastern China’s Wenzhou plans to offer a package of incentives including tax cuts to help thousands of small and medium-sized enterprises (SMEs) out of a financial crisis that threatens to bankrupt many and potentially leave tens of thousands out of work, the Oriental Morning Post reported on Monday, citing a local official.
“We [government officials] have been attending one meeting after another, all in an effort to work out solutions to save these collapsing small firms, and have so far come up with a package of measures including tax cuts and provision of new loans,” Zhou Dewen, director of the local council for promoting SMEs, told the paper.
Zhou’s words coincided with a statement from finance authorities in Wenzhou, cited by Hong Kong media, which said the municipal government had turned to the Zhejiang Provincial Government for help, demanding some RMB 60 billion in additional loans from the People’s Bank of China (PBoC) for the sake of preventing a systemic collapse of SMEs.
Wenzhou is a celebrated entrepreneurial city in China, home to thousands of smaller companies.
Zhou dismissed the cited amount as being “far from enough” to save the large number of SMEs in trouble. “I hardly doubt any amount below RMB 100 billion would solve the problems SMEs are facing.”
“You’ve no idea exactly how many more small firm bosses are running away [from their financial problems] and how many bad loans there are,” Zhou cautioned.
Tighter Lending
Nearly 20% of the 360,000 SMEs in Wenzhou have halted operations due to cash shortages, according to data from the city’s council for promoting SMEs.
Of the 855 companies surveyed by the Wenzhou Economic and Information Commission, almost 80% admitted they were struggling to survive the liquidity crunch, and some had turned to “informal” lenders that require much steeper rates than traditional institutions to raise money.
The PBoC’s tightened monetary policies have forced large numbers of Chinese SMEs to informal lending, or underground lenders, the last resort for many small firms feeling the crunch.
China has raised banks’ reserve requirement ratio 6 times and hiked interest rates 3 times so far this year to curb soaring inflation.
China’s current benchmark interest rate of one-year deposits is 3.5% and banks are required to reserve 21% of their deposits, freezing some RMB 2.1 trillion that could otherwise be used for lending.
Premier Steps up
Chinese premier Wen Jiabao stepped up to address the widespread issue in Wenzhou during his inspections at a local loan company on Oct. 3, calling for increased tolerance for SMEs’ non-performing loan ratios and suggesting that small companies should be a priority for bank credit support and be granted more tax support.
“Effective measures should be taken to curb underground lending, stamp out illegal fundraising and help solve the problems of collateral and capital shortages of SMEs before the risks evolve on a regional scale,” the premier said during his trip.
Mass Closure Fears
Fears over large-scale factory closures surfaced when 2 large Chinese manufacturers shut down operations in July, sparking concern that this would just be the beginning of a series of shutdowns in the sector nationwide.
In early July, both Dongguan-based toy maker Suyi Toy Co. Ltd. and textile enterprise Dingjia Textile announced bankruptcy, threatening some 2,000 jobs.
Fears were partially placated when Ministry of Industry and Information Technology spokesman Zhu Hongren said that large-scale factory closures would not occur.
But signs of a contraction in manufacturing keep surfacing, from problems in Wenzhou to the latest HSBC China Purchasing Manager Index (PMI) figure.
HSBC’s China PMI was flat month-on-month in September at 49.9 as weak international and domestic demand curbed output growth. A reading below 50 indicates contraction in the manufacturing sector.
According to the bank’s survey, respondents said weak demand led to a fall in new business for 2 consecutive months, while new export orders were also down slightly on weakness in international markets.
Qu Hongbin, chief economist at HSBC China, said that industrial activity is likely to continue slowing for the next several months due to impact from tighter credit, but said he didn’t see a precipitous fall coming.
China’s official PMI in September, issued by the China Federation of Logistics and Purchasing one day later, rose to 51.2 from 50.9 in August, ending a continuous decline between March and July. But sub-indices of the PMI still show that uncertainties remain in the export sector, clouding prospects for SMEs.