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