Small Companies in China Brace for Tough Times Ahead

By Shannon Liao
Shannon Liao
Shannon Liao
Shannon Liao is a native New Yorker who attended Vassar College and the Bronx High School of Science. She writes business and tech news and is an aspiring novelist.
August 1, 2013 Updated: August 1, 2013

Burdened by heavy taxes and a lack of profits, small and medium-sized Chinese companies also find it difficult to get financing from banks in China. With an economic malaise looking increasingly likely as growth slows, many of these companies are preparing for the worst.

The average Chinese business gives up 40 percent of its profits to pay off taxes, a rate higher than Western countries, according to a July 22 report co-authored by the Ministry of Finance.

A new rule to remove the lower limit on interest rates on bank loans, instituted on July 20, may aggravate, or at least fail to alleviate the situation. In general, many experts agree that small and medium-sized companies are shortchanged by Chinese bank policies.

“Small and medium companies would be lucky to even take out a loan at all. They’ve no chance at a lower interest rate loan,” a Construction Bank of China staff member told the Epoch Times.

“It’s rare for a bank to have an interest rate lower than seven percent. And such banks would never lend to small companies,” says Andy Xiao, a financial commentator based in China.

“Over the past decades, whenever I need money, it’s always nearly impossible to get a loan from the bank, so I had to borrow from friends. They charge me up to ten percent interest. Loan sharks are even worse.” Li Zhenhao, general manager of small-sized Beijing Wenyikang Trading Company, told Epoch Times.

On the other side of the spectrum, large companies enjoy relatively more financial benefits, but those with regime ties hold the greatest advantage.

“Even big companies, if they’re not financially well-off, have a difficult time taking out lower interest rate loans,” the Construction Bank of China member said. “Only state-owned companies have any real chance of taking out these special loans that discount them from ten percent of interest.

An anonymous source, cited in a June study by Yale doctoral student Rory Truex, said that banks “will refuse to lend you a loan or they will check on you all the time,” if dealing with a private company rather than a state-owned one.

Large companies also have the advantage of being able to profit from interest rate arbitrage, a China Finance Net analyst, surnamed Lee, said. “They can issue bonds, at a much lower cost than loans, an option that small and medium sized companies lack.”

Many local banks need the funds generated by low interest rate loans and have maintained a lower limit on loans, a week after the central bank implemented the rule. Bank experts express skepticism that the interest rate can fall any lower when liquidity is so scarce.

Despite the bleak economic outlook for small and medium-sized companies in China, some experts say that the new interest rate rule isn’t a significant cause for concern.

“Removing the lower limit isn’t going to impact the current lending rate very much in the future, since most lending rates are already above the limit,” says Ma Jun, Managing Director and Chief Economist for Great China at Deutsche Bank.

“The profits of most companies fall below the interest rates they are charged with,” said Zhou Dewen, chairman of the Wenzhou SME Development Association. “Even if companies did get their hands on a loan, they’d literally be lining the regime and bank’s pockets.”

Translation by Frank Fang and Billy Xu. Research contributed by Ariel Tian.

Shannon Liao
Shannon Liao
Shannon Liao is a native New Yorker who attended Vassar College and the Bronx High School of Science. She writes business and tech news and is an aspiring novelist.