Perfect storm of conditions slams SMEs

BEIJING - China's small and medium-sized enterprises (SMEs) are facing staggering operational challenges as they are hit by increasing production costs and tight monetary policies, said officials and economists on Thursday.

"Their operational situation may be even worse than that during the financial crisis in 2008," said Gu Shengzu, vice-chairman of the Central Committee of the China National Democratic Construction Association, at a forum.

Gu said he had recently conducted a survey of around 600 SMEs. Their maximum net profit margin was 3 percent, and most were operating at a deficit, he said.

Huang Mengfu, chairman of the All-China Federation of Industry and Commerce, said rising labor and raw-material costs have squeezed the profit margins of China's SMEs.

"The government's administrative measures of controlling prices to rein in soaring inflation have also limited the companies' profit margins, especially for the small and medium-sized operators," said Huang.

In April, China's Consumer Price Index, a main gauge of inflation, increased to 5.3 percent from a year earlier, after a 32-month high of 5.4 percent in March.

"The figure in June may be higher than 6 percent, and the government is expected to continue its tight monetary policy in the second half of this year," said Wang Jun, an economist with the China Center for International Economic Exchange.

The People's Bank of China, the central bank, raised the reserve requirement ratio for banks by 0.5 percent on May 12, the fifth increase since the beginning of this year, to fight stubborn inflation.

The move has made it more difficult for SMEs to borrow money, economists said.

"Without enough funds, some enterprises in East China, in areas such as Wenzhou in Zhejiang province, ceased production or even went bankrupt," Wang said.

"Under the high inflationary pressure, it is more important to reduce taxes for SMEs than raise interest rates," said Gu, who believes that tax reductions will help businesses to increase salaries and improve domestic consumption.

He also urged the introduction of more private equity and venture capital investment institutions to support technological innovation by SMEs.

An index, published by the China Association of Small and Medium Enterprises and indicating their development, showed a 2.2 points decline to 104.1 in the first quarter of this year, compared with 106.3 in the fourth quarter in 2010.

The soaring costs of energy, raw-material and labor have lowered investments and profits for these companies, according to the statement from the association.

China Daily

(China Daily 05/20/2011 page14)