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Credit Help for Chinese SMEs

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With Chinese exports sinking 25 percent in the first quarter of this year, small and medium-sized enterprises (SMEs) are struggling to stay afloat as they try to navigate their way around international credit terms and difficult-to-obtain bank loans in a climate of high risk.

The big question for smaller-cap local exporters is how to weather the financial storm until Western buyers pay up, which often entails a wait of two to six months from the time of shipping.

"Banks are lending money to the blue chips but continue to have long and arduous credit processes before new credit lines are set up," said Karl Alomar chief executive of the British export financing institution China Export Finance (CEF).

"SMEs are still being left out in the cold," Alomar said.

According to Alomar, that's the time when financing firms like CEF can serve SMEs.

"Our company has the ability to leverage the credibility of buyers of those SMEs and provide them with the credit and resulting liquidity they need in order to stay competitive in this market," he said.

Alomar said inquiries from SME owners in China have surged over the past year despite a new government policy urging state-run banks to liberalize their lending.

Loans by China's state-run banks have risen dramatically this year but neither this, nor the central government's 4-trillion-yuan (US$586 billion) stimulus package and trimmed interest rates, have been able to cover all the bases, Alomar said.

Blue Jade Moto is one example of a company that continues to fall outside the safety net.

"We didn't qualify for a bank loan before the rules changed, and I was told we still do not qualify after the new policy was implemented," an export manager for the Wuxi-based motorcycle manufacturer told China Business Weekly.

The export manager declined to provide his full name.

CEF helps exporters secure up to 120-day payment terms. It purchases the Chinese suppliers' receivables by paying 80 percent of the sum upfront at the bill of lading and then provides buyers with uncollateralized credit for up to 90 days.

CEF ascertains credit and assumes the burden of risk on the side of the buyer. It also allows customers to finance individual transactions rather than full books of business in order to resolve periodic cash flow constraints at a more efficient overall cost.

Alomar said that, given the lack of direct competition, his company has flourished despite the recession.

The future looks brighter still as maturing Chinese companies increasingly conform to international credit practices, he added.

"The demand for our products has gone through the roof. Companies looking to grow in this challenging economic climate are searching for innovative solutions," Alomar said.

"We have seen numerous companies and banks come into China and try to apply pre-existing formats and models here, but none of them have succeeded. We are different because we have tailored our services to suit China," he said.

Alomar said CEF does not consider incoming banks as competition.

"We feel there are great partnership opportunities wherein they can benefit from our expertise and our services" he said.

CEF grew by more than 500 percent during the last fiscal year, but it has watched that rate of growth decline this year due to tighter credit considerations.

Meanwhile, Chinese companies' demand for export insurance has risen threefold over the last 12 months, from US$230 billion to US$690 billion, as they becoming increasingly wary of the stability of their Western counterparts.

With CEF's low-risk approach well suited to such a climate, Alomar said more companies could benefit from his services if they knew about them.

"Now one of our biggest tasks is educating people about what we can do. Awareness is growing, but there is still much work to do," he said.

(China Daily July 13, 2009)