|
Starved for CASH
By Zhu Ping (China Daily)
Updated: 2009-09-15 07:53 With the morning sun just peaking over the horizon, Kang Hongqiang is already at the gates of his paper goods factory in Dongguan, ready to start a new business day. Orders have started to pour in since June as China's economy recovers from the global financial crisis, meaning he can only afford four hours' sleep a night before he must be back at his desk. "Business is getting better and we seem to have got through the worst of it," said the husky-voiced 33-year-old. But he complained that it is still too hard for small Chinese firms to overcome financial difficulties because not enough small or short-term business loans are available.
Kang's Xinying Packaging Ltd opened in April last year in a small factory in the city's Chang'an township, part of Guangdong province's manufacturing hub, with an initial investment of about 150,000 yuan ($22,000). Just months later, the world was hit by the worst economic depression since the 1930s, leading to the closure of more than 670,000 small and medium-sized enterprises (SMEs) in China. Kang's company survived but was forced to run at a deficit. It reached an annual sales volume of 650,000 yuan but had been predicted to hit 1 million yuan before the crisis. "I'm much more optimistic about this year. My factory is on the road to recovery," he said, adding he now trades with two foreign-funded firms and that most orders are for packaging, such as paper boxes and worth 50,000 to 60,000 yuan each. However, payment can take up to 40 days and, in the meantime, Kang must fork out 8,000 yuan a month on rent and around 40,000 yuan in wages to his 40 workers. "I might need to spend 50,000 yuan on materials for one order, but because I have not been paid for a separate completed order I have to reject a new one as we have no liquid cash," he said. "With another 200,000 yuan we would have liquidity. Without it, my company cannot run smoothly." When staff at the local branch of the China Construction Bank refused his loan application because he did not have a mortgage on the factory, Kang turned to the Standard Chartered Bank but was put off by the high monthly interest rate. "Unless a firm or organization will vouch for me, the banks will not consider lending me the money. I don't know how to go about getting a guarantee from a third party," he explained. "I had to borrow 80,000 yuan from friends and relatives. I also got 50,000 yuan from a small loan company at a monthly rate of 2.3 percent and once borrowed 80,000 yuan from a private firm at 10 percent interest." Kang's company is just one of the estimated 42 million SMEs in China struggling to stay afloat in a sea of uncertainty. Of the 7.37 trillion yuan in loans approved by banks in the first half of this year, medium-sized companies made up 47 percent of the successful applicants, while small firms made up just 8.5 percent, said Li Lianzhong, head of the economy bureau for the Central Policy Research Office, in a recent People's Daily report. "The difficulties for SMEs in getting loans is an international problem and is not just confined to China," said Liu Yingqiu, a researcher in private economy at the Chinese Academy of Social Sciences (CASS). "The enterprises usually don't have a mortgage, nor are they a profitable investment to banks. A State-owned bank will only earn about 20,000 yuan from a one-year loan of 200,000 yuan to a SME. "The same reasons make it hard for firms and individuals in rural areas to borrow money, too, meaning a large number turn to private lending or even illegal financing." Illegal loans totaled about 800 million yuan in 2005, according to Li Jianjun, a professor at the Central University of Finance and Economics in Beijing. In his book, Research on China's Underground Financing (Zhongguo Dixia Jinrong Diaocha), he writes that private SMEs are the main link in a underground financing chain that sees unlicensed lenders charge exorbitant rates of interest. SMEs contribute more than 60 percent of the country's gross domestic product growth, more than 50 percent of its tax revenue and more than 80 percent of urban jobs, said Bao Yujun, chairman of the Research Association on the Private Economy, an academic body jointly resourced by the United Front Work Department of Communist Party of China Central Committee, the Central Policy Research Office, State Administration for Industry and Commerce, All-China Federation of Industry and Commerce, Chinese Academy of Social Sciences, Development Research Center of the State Council and Peking University. "Yet the financial challenges they face are not new they have simply been made tougher by the economic slowdown. The government should be looking at ways to help them develop given their essential role," he added. At a State Council executive meeting in August, Premier Wen Jiabao said the central government would step up efforts to help SMEs raise funds, including the long-awaited growth enterprise market, which is finally set to open at the Shenzhen Stock Exchange in October. Many experts, however, say only by establishing small and medium-sized banks (SMBs), as well as more town and village banks, can SMEs get the support they so vitally need. "China's banking system has a severe lack of SMBs and regional capital markets," said Yao Yang, a researcher at the national school of development at Peking University. "In recent years, the nation has had a big savings rate but the amount of domestic investment has been too small. "It is abnormal that such a large proportion of savings would remain idle while so many SMEs are mired in financial troubles. Compared with big banks, SMBs would be far more likely to grant loans to smaller firms as they have far less funds but simpler procedures.
"The banking industry has already opened up to foreign banks, and it's unfair there are so many barriers for domestic private investors." Speaking at the World Economic Forum in Dalian rencently, Liao Min, spokesperson for the China Banking Regulatory Commission, told China Daily that 1,000 new SMBs would be set up in the next three years. Controlling the risks of a loan also remains a huge challenge for creditors and debtors. The Poverty-Alleviation Economic Cooperative in Yixian county, Hebei province, was started by the CASS in 1993. Like the trailblazing Grameen Bank in Bangladesh, the cooperative offers small loans to poor individuals, of which there are at least 15 million living in China. "We don't require a mortgage and, with a mutual guarantee provided by any five households, one family can borrow up to 3,000 yuan," said fund worker Xiao Tian, 30. "The only criteria are applicants must be 18 to 50 years old, in good health and have tangible business items, such as livestock." People can choose to loan cash over 12 months at an 8-percent monthly interest rate, 50 weeks at 2 percent or six months at 15 percent, she said. "One problem, though, is our system is not strict enough and it is hard for us to investigate properly whether someone is a potential cheat," she added. "Two years ago, one man ran off without paying back a 15,000-yuan loan he got with a five-household guarantee. I had to follow him all the way to Beijing and beg him to give the money back." Risks are inevitable with any investment but they can be controlled, according to many financial experts, including those at MicroCred, a foreign-backed firm offering micro-finance services in Nanchong, Sichuan province, that has extended 3,500 loans totaling 80 million yuan since it launched in December 2007. "We offer loans up to 100,000 yuan to SMEs and farmers, but our average is for about 20,000 yuan, so risks are not that high," said a manager surnamed Chen, who added that, of the company's 30 staff, 18 are account managers assigned to vet potential borrowers. "Their job is to collect as much information as possible about customers' businesses, capital requirements, and claims and liabilities. They even find out an applicant's personal habits, such as what brand of cigarette they smoke, as well as visit them regularly to offer business advice." Louis Lim Tian Fuh, managing director of SME banking for the Shanghai-based Standard Chartered Bank, agreed that investigating customers' backgrounds and checking the market prospects are important measures to reduce the risks of lending. "Our company also requires clients to pay and receive money through our bank, which will enable us to keep a check on their cash flow," he added. Banks may worry about the money they lend to SMEs, but a series of scandals exposed this year has also highlighted the risks SMBs face. In February, a credit guarantee company cheated Beijing Rural Commercial Bank out of 460 million yuan using fake documents, and four months later, Wang Xin, vice president of Guangdong Development Bank, was arrested on suspicion of allegedly profiting from auctioning off bad debts at cut-rate prices. "Encouraging private investment may bring more risks to the financial system but there is no reason to throw the baby out with the bathwater," said Yao. "China needs to establish an effective regulatory system to monitor the banking sector. "The key is to prevent joint frauds by banks and surety companies, such as the case with the Beijing Rural Commercial Bank, and this is why the People's Bank of China must shoulder more responsibility in supervising SMBs." The central bank monitors local banking sectors through regional branches in the cities of Shanghai, Tianjin, Guangzhou, Nanjing, Shenyang, Wuhan, Xi'an, Jinan and Chengdu; operations offices in Beijing and Chongqing; 303 municipal sub-branches and more than 1,800 county-level sub-branches. "If these branches all function correctly, they can safeguard financial stability within their jurisdictions," said Yao. CASS researcher Liu feels deposit insurance and risk-sharing systems are also essential and mean local governments would not have to be heavily involved in a strict supervising system. "Governments don't need to bear all the risk. It should be shared between the depositor, the bank, the insurance companies," he said. "There is also the risk local governments may see SMBs as personal piggybanks and force them to loan its departments huge sums of money. "If local authorities interfere too much, it might lead only to more serious debt."
 (China Daily 09/15/2009 page7) |
