Credit will not remedy the current stress on China's small and medium enterprises, despite cash injections being widely touted as a quick-fix to lift smaller players mired in capital-shortage, industry sources said on Friday.

Chinese small and medium enterprises (SMEs) are hoping more lending will drag them out of problems created by the global credit crunch and tight domestic monetary policy.

Export-oriented SMEs are suffering the most from the slower external demand due to the spill-over of the subprime crisis and the fast appreciation of the yuan in the first half.

The yuan has gained more than 6 percent in the first half, cutting Chinese exporters' competitiveness.

The tight monetary policy has also stymied capital flow for many businesses.

Lao Jin, a jewelry processor based in Shenzhen, Guangdong Province, had to dump expansion plans because he couldn't get money from the banks. However, he's one of the lucky ones. Others in a similar situation had to close their doors.

More than 67,000 SMEs have closed down in the first half of 2008, said the National Development and Reform Commission. Of those, about 10,000 companies were from the textile sector, with labor intensive industries suffering most from the increase of labor costs and lack of capital.

"SMEs are being particularly hit by the loan restrictions - large firms are more important customers and banks prefer longer-term financing because of the larger spread at the end," said Standard Chartered in a research note. "SMEs, by contrast, tend to rely on external funding for cash-flow, and even the profitable ones will be finding things hard."

A raft of new policies are expected to act as a shot in the arm to the millions of SMEs in China.

The NDRC, the country's top planning agency, was reported to be setting up a national bank for SMEs.

The latest immediate help has come from the People's Bank of China, which has granted an extra credit quota of 5 percent to national banks and doubled the offering to local banks for credit for SMEs.

Overseas banks like HSBC have also got the nod from the central bank to ask for additional credit quotas for lending to rural, SME businesses and quake-hit areas.

"SMEs mean a lot to the Chinese economy as they create jobs and fortune. That's why authorities are acting to boost the sector," said Lu Zhengwei, an Industrial Bank analyst. "However, increasing credit is not a cure-all and banks are not all to blame for limiting credit to SMEs."

But many banks have declined to offer credit to SMEs. That refusal showed Chinese banks were progressing as they had become more risk-focused, Lu said.

"The market mechanism took effect by driving out the unqualified players," Lu said. "It's natural to see the bankruptcy of some sub-standard small players.

"Credit support disturbs the market to some extent. Those SMEs surviving a longer period just because of a credit pump may still have to say goodbye to the market and may lead to growing bad loans at banks," he said.

Analysts said moves including credit innovation, training for unemployed SME staff and structural adjustment within SMEs were needed to reinvigorate the sector, rather than just offering more credit.

Wu Yonggang, a Guotai Jun'an Securities Co. analyst, said increasing related measures were more important than a single credit quota expansion. "A question mark looms over whether banks will really grant the expanded quota to SMEs amid the uncertainty of the economy," said Wu.

"We think mechanisms including an SMEs fund or offering interest- discounted finance is also needed in the whole SME financing system," he said.

Analysts said it boiled down to SMEs having to do more than just wait for a helping hand from governments or lenders.

Jack Ma, chairman of Alibaba Group, said SMEs should be fully prepared for the upcoming difficulties.

"This is a difficult period for the Chinese economy and especially for SMEs. However, it also gives a chance for SMEs to examine their business model and decide whether to stick to it or not," he said.

(Shanghai Daily August 16, 2008)