Money Crunch in China Forces Wave of Small Business Failures
China’s economy is caught in a difficult dilemma between trying to maintain growth and controlling inflation. Tougher lending policies are favoring large national and state-owned companies, while privately owned small and medium-sized enterprises (SMEs) are struggling or closing down due to lack of financing. At the same time, food prices continue to soar, and the Consumer Price Index (CPI) in June surged to a three-year high.
To curb inflation, monetary tightening has become a routine measure by the People’s Bank of China (PBOC), the country’s central bank. In a little more than a year, the PBOC has increased the reserve requirement ratio multiple times. Hence, the credit growth of commercial banks has slowed down since the beginning of this year.
Wenzhou City, a coastal manufacturing hub in China’s southeastern Zhejiang province, can serve as a benchmark for private enterprises in China. By early July, nearly 20 percent of SMEs in Wenzhou had shut down due to disruptions in the capital chain, the Yangtse Evening Post reported.
The business environment for SMEs is even worse now than it was during the 2008 global financial crisis, according to the latest survey by the All-China Federation of Industry and Commerce (ACFIC), which covered 16 provinces, including Guangdong, Zhejiang, and Jiangsu.
This phenomenon is mainly caused by financial regulation and a credit crunch.
On June 20, the central bank raised the deposit reserve ratio by 0.5 percent for the sixth time this year and the 12th time since 2010. After the hike, big banks will have their deposit reserve ratios set at a historical high of 21.5 percent, and over 380 billion yuan (US$58.8 billion) of bank funds will be frozen from lending. The channel for SMEs to get money from banks has thus become narrower.
Due to the national macro-control policy, bank loans are biased towards large state-owned enterprises and national key projects. It is very hard for SMEs to obtain bank loans.
A recent survey by the branch of the PBOC in Wenzhou shows that lending rates charged by various major banks in the city have increased 30 to 80 percent. Though it is already expensive to borrow from banks, only a few companies are able to obtain loans.
Companies who are unable to get bank loans had to turn to private loans and loan sharks. The amount of underground financing in Wenzhou alone exceeds 180 billion yuan (US$27.85 billion), according to China Finance Information.
Faced with unprecedented challenges in their financial supply chains, many SMEs in Wenzhou have gone bankrupt.
Not just coastal cities are affected; Chongqing in the western region, which is widely considered to have a better financial environment, is also experiencing large-scale cash flow problems. Other provinces and cities nearby may be even worse off, China Economic Times said on July 11.
Huang Fuxing from the Institute of Economics at the Shanghai Academy of Social Sciences said that the situation in the second half of this year will be even worse, and more small companies may go out of business, according to Shanghai Securities News.
High Tax Burden
A report released by ACFIC on Jan. 18 showed that in 2010, the total tax revenue from private companies was 1.117 trillion yuan (US$172.9 billion), up 172.4 percent from 2005, with an average annual growth rate of 22.2 percent. The increase is 2 and 12.7 percent higher than that of national and state-owned enterprises respectively.
Bao Yujun, president of the Chinese Private Capital Economy Research Association expressed concern over the high tax burden’s counterbalancing efforts to rein in inflation.
During times of inflation, there should be tax cuts, which can preserve jobs and maintain payrolls, Bao said.
“All market economy countries give first priority to solving the unemployment issue. However, the overall tax burden is not shrinking [in China] but increasing now,” Bao was quoted in Zhejiang Businessmen Magazine.
Chinese economist Qi Yanchen agrees that the main problem for private enterprises is high taxes. “Various taxes and fees account for 30 percent of operating costs,” Qi told New Epoch Weekly.
Rising Operating Costs
Former small business owners from Zhejiang and Guangzhou told New Epoch Weekly that workers’ wages have increased at least 20 percent last year.
A leather industry entrepreneur in Wenzhou said that, compared with 2008, the price of raw materials had risen 13 percent, electricity 30 percent, and coal 20 percent, among various other increases. Consequently, his company’s gross profit has dropped significantly and he had to raise the price of his product. But getting orders has become harder, he said.
Many China watchers have commented that China is growing rich, but others say it’s the state-owned enterprises that are growing richer and richer, not the privately owned SMEs.
The general manager of a private company in the casting industry in Hebei expressed his frustration about the government not caring about the SME sector.
“Now is a difficult time for all domestic small and medium-sized businesses, mainly because the government doesn’t want them to develop and has restrained their profitability too much,” he told New Epoch Weekly.
SMEs play important roles in a country’s economic and social development as they bear the majority of employment pressure in society and also provide direction for future economic development.
The plight of SMEs in China may indicate that China’s economic model of the past 30 years is coming to an end.