Many Small and Medium-Sized Chinese Companies Close Down

July 3, 2009 1:25 pm Last Updated: July 3, 2009 10:47 pm

The Chinese Academy of Social Sciences reported a recent survey showing that 40 percent of China's small and medium-sized companies have closed down, and another 40 percent are on the verge of closing down during the current financial crisis.

Moreover, 99 percent of China's industry is composed of small and medium-sized companies which contribute more than 60 percent of GDP, 50 percent of national revenue, and 75 percent of urban employment.

This report, therefore, raises a question about the Chinese regime’s report of a 6.1 percent GDP growth rate for the first quarter.

Peter Chen, a senior researcher for the Chinese Academy of Social Sciences, reported that this survey took place over the past six months, and the result is yet to be finalized.

During a CCTV interview, Chen said, “A large portion of China’s companies are facing a difficult situation, and some have even closed down. The number closing down is far above average. In the past, companies closed down when the GDP growth rate was 5 percent. However, the current reported GDP growth rate of 6.1 percent is not borne out by the existing economic environment."
“Insufficient investment could be a reason. Some companies have a market share and customers, but cannot continue to manufacture due to lack of capital,” Chen continued.

Yong Yu-Chin, Deputy Director of the Small and Medium-Sized Industries Service Center in Shenzhen City, indicated that more than 60 percent of the industries in Shenzhen have encountered financial difficulties. In general, they need short term loans in amounts ranging from US$1.43 million to US$1.75 billion.

The majority of the 42 million small and medium-sized companies in China are reported to lack collateral assets. This has also increased the risks involved in bank loans. In 2008,  non-performing loans to small businesses reached 11.6 percent.

The China Banking Regulatory Commission (CBRC) issued the document “Guidance for Small Business Loans” in July 2005, requiring that loans to small and medium-sized companies should provide higher amounts and require higher incremental payments than other loans. However, these measures have not been implemented. Some believe this is because of concern that high-risk loans to small and medium-sized industries could lead to substandard bank loans and subsequent defaults.