At last, a ray of sunshine for the embattled SMEs

PUBLISHED : Monday, 05 September, 2011, 12:00am
UPDATED : Monday, 05 September, 2011, 12:00am


These days, the mainland's toiling entrepreneurs of small and medium-sized enterprises are a wretched lot. They are facing an increasingly bleak future as overseas orders are drying up, the working capital is running out, prices of raw materials and labour costs are soaring, and bankers who are stingy even on good days are nowhere to be found.

One would expect them to feel elated at the news that government help is coming their way. Over the past few weeks, mainland officials have made noise about giving more support to the SMEs, which provide most people with work.

This culminated last week when Premier Wen Jiabao pledged in an article that the government would aim to solve outstanding issues of SMEs suffering from a shortage of funds. Wen's pledge has raised expectations that the mainland leadership may consider boosting lending, especially for SMEs, along with agricultural production and a government programme to increase housing for low-income families, while continuing to maintain tight controls over the rest of the economy. But people can be forgiven for being cynical, as this sounds all too familiar.

Over the past decade, it has become an annual ritual for the mainland leadership to vow in all its sincerity that it would boost bank lending to SMEs, open up market access and enable them to invest in hugely profitable industries, including banking, energy and infrastructure, which are largely monopolised by state-owned conglomerates. But every year, the government help has always come up short, and it has even been accused of merely paying lip service in the state media, fittingly captured in a Chinese idiom that means 'Big thunder but little rain'.

But there are reasons to believe that the mainland leadership is more worried and thus may be more forthcoming this time. Faced with the global economic and financial uncertainties precipitated by the debt crises in Europe and the United States, as well as soaring inflation at home, the leaders have found it tougher to steer the world's second-largest economy, still propelled by two growth engines: exports and government spending.

On the one hand, the government has no choice but to continue maintaining tight monetary policies and cut government investments to tame inflation, but on the other hand, falling overseas demand, coupled with the tight monetary policies, has driven exporters, most of them SMEs, into trouble. To make things worse, soaring prices of raw materials and labour costs have further squeezed the already razor-thin profit margins of those SMEs.

The state media have begun to warn that thousands of SMEs are on the verge of collapse, and some massive collapses of small companies have already taken place in some areas of Zhejiang province, one of the mainland's most dynamic powerhouses dominated by the private sector. Such a scenario would be nightmarish for the leadership, as the sudden surge in unemployment would threaten stability. Senior mainland officials have denied that the number of closed firms is significant but admitted that the SMEs face serious problems. Gu Shengzu , a former deputy governor of Hubei and now a standing committee member of the National People's Congress, said at a forum in Shanghai last week that this year would be one of the most difficult for SMEs. Citing his own investigation and that of others, he said that between 60 and 70 per cent of the mainland's SMEs now faced a serious issue of survival.

Of all the problems, the lack of funding is unprecedented. He said that only about 10 per cent of the SMEs could obtain loans from the conventional banking system, and in Zhejiang about 80 per cent of small firms turned to so-called underground banking for financing, with annual interest rates running as high as 120 per cent. Even so, he said that the supply had still fallen short of demand. He warned that the rampant and unregulated underground banking would not only put enormous financial pressure on the SMEs, but it could also signal potential huge credit risks.

Gu's warning helps explain partly why the government is more serious this time in addressing the funding issue for SMEs. To be sure, underground banking, particularly in the southern provinces such as Zhejiang and Guangdong, is nothing new on the mainland and has been expanding exponentially because of the demand, despite repeated government crackdowns. Although Beijing has been encouraging the conventional banking system, which is dominated by the big state banks, to lend more money to SMEs, the reality is that the bulk of the lending goes to the state-owned businesses, forcing SMEs to turn to underground banking. But state media now warn that underground banking has the serious risk of running out of control and creating a financial bubble whose bursting could bring not only financial chaos but social instability.

Indeed, judging by the media reports, the underground banking, which targets SMEs and was previously dominated by rich businessmen, has now become a national phenomenon, even attracting housewives and farmers who have invested their life savings in the loan-sharking syndicates. Several dozen mainland-listed companies are reportedly involved in loan-sharking, with some making more money from the practice than their principal businesses. Even the insurance companies and banks have reportedly evaded controls to channel lending to the underground banking syndicates for higher profits.

It is no wonder that Wang Qishan, the vice-premier in charge of financial affairs, said last month that the government would focus on cracking down on illegal financial activities, targeting illegal fund-raising and financial pyramid schemes in particular, while boosting lending to SMEs. Owners of SMEs will soon find out if the big thunder brings more rain this time, as the central government is rumoured to be planning a high-level meeting later this month to thrash out concrete measures to help them.