"Small and medium-sized enterprises (SMEs) in Zhejiang are facing gloomy prospects," the SME bureau of Zhejiang province writes in a report to the National Development and Reform Commission (NDRC), China's top economic regulator.
However, some officials from the East China's province say the situation isn't as bleak as others may say.
Since the beginning of the year, a series of factors, including the fast appreciation of the yuan, a tight monetary policy, rising material costs, a lower export tax rebate rate and the slowdown of world's major economies, have added up to a very inhospitable atmosphere for SMEs in Zhejiang province.
No exception
Feiyue Group used to be the sewing machine manufacturing leader in China, and the model of township-enterprise in Taizhou, Zhejiang province. With more than 700 patents and 500 different products, Feiyue is the world's largest in manufacturing scale.
However, as a result of the rising material costs and the yuan's fast rise, Feiyue's export value in the first quarter of this year was only $18.48 million, down 44 percent over the same period last year, according to the 21st Century Business Herald.
The shrinkage in international trade has given the export-oriented enterprise a strong blow, while the reduced loans to SMEs from banks have made the situation even worse: Feiyue had to turn to underground private lenders to maintain its cash flow, but the higher interest rates left Feiyue struggling to pay the debts.
Firms smaller than Feiyue are facing shutdowns.
In the first quarter of 2008, production in the sewing machine industry in Taizhou fell 15.3 percent year-on-year, followed with a significant decline in turnover and benefits.
In Wenzhou, China's largest manufacturer of small goods, about 20 percent the enterprises have stopped production. Take the optical industry for instance. The average export price for a pair of sunglasses was only $0.77 in the first half of this year. Most of the manufactures gained nothing from production.
Statistics from the economic and trade commission of Zhejiang province show that 10,700 enterprises, or 19.6 percent of all firms in the province, saw losses between January and May. The hardest hit are mainly those in the labor-intensive sector, such as leather, chemical fiber, clothing and printing industries.
"I dare not accept orders now. With the yuan appreciating so fast, I will definitely lose money if I do," 21st Century Business Herald quoted an entrepreneur in the textile industry in Shaoxing as saying.
As a result of the credit crunch, many SMEs, like Feiyue Group, have turned to underground private funding channels, which are flourishing in the province.
But even these private lenders have become much more cautious than before, for fear that they cannot get back their money. Sources say the annual interest rates of private loans have risen about 100 percent since the previous year.
Financing difficulties
In the beginning of this year, China's government tightened monetary policy to curb inflation and prevent economic overheating, put stringent controls on the loaning volume of banks, which frequently favor larger enterprises over their smaller counterparts.
According to an investigation by the SME bureau of Zhejiang province, during the first quarter of this year, new loans from four State-owned banks, namely the Industrial and Commercial Bank of China (ICBC), the Agricultural Bank of China, Bank of China, and the China Construction Bank, were reduced by 25 percent compared to the same period last year.
During the same period, the ICBC alone reduced loans to SMEs by 87.5 percent, down from 9.8 billion yuan last year to 1.3 billion this year.
Insiders in the banking industry say that the actual situation could be worse than what the statistics say, because the increased comprehensive financing cost has also become a heavy burden for many SMEs.
"In order to control the risks, some banks require certificates of deposit, which significantly increases the financing cost," a banking insider in Zhejiang was quoted by the 21st Century Business Herald as saying.
It is estimated that in the first quarter of this year, the financial cost of SMEs in Zhejiang has increased by 40.5 percent, and the net interest expenses increased by 45.2 percent.
"But the tight monetary policy is not the only reason for the hardships SMEs have been through. A combination of factors, such as the inhospitable export environment and even the industrial structure of Zhejiang, contribute to the situation," the banking insider says.
New hope
Yet recently, China's policymakers have reached a consensus that successfully solving the problem between credit control and sufficient funding for the SMEs is crucial to the country's economic development.
President Hu Jintao and Premier Wen Jiabao both promised to help SMEs during their recent visit to China's coastal areas.
According to the NDRC, there are 42 million SMEs in the country, of which more than 95 percent are privately owned.
Making up more than 99 percent of the country's enterprises, SMEs have contributed to 60 percent of the gross domestic product (GDP), about half of the country's total tax revenues, and provided more than three quarters of urban employment opportunities.
And senior officials from the Eastern China province say the situation isn't as gloomy as others may say.
SMEs in Zhejiang did encounter a number of new challenges and difficulties this year. But the situation is not as bad as being reported by some media," says Huang Kunxin, director of Zhejiang Provincial CPC Publicity Department.
It had been reported that more than 20 percent of the SMEs in Zhejiang had closed since the beginning of this year and tens of thousands of enterprises went into bankruptcy in Taizhou city alone.
But according to Huang, the total number of SMEs with a sales volume above 5 million yuan amounted to 51,400 by end of June, compared with 45,900 a year ago. Meanwhile, the number of SMEs with a sales volume below 5 million yuan stood at 782,500, which is about the same with previous years.
"Despite a slowdown, Zhejiang's economic growth is still robust," adds Liu Ting, deputy-director of the provincial reform and development commission.
In the first half, Zhejiang's economy expanded 11.4 percent from a year earlier, much higher than the nation's average of 10.5 percent. However, it represented a visible slowdown from 2007, when its economy expanded more 14.5 percent for the whole year.
"Such slowdown is in line with the downward economic cycle," says Liu. "It's natural for businesses in Zhejiang to undergo some adjustment after a period of fast growth."
"We did met a great deals of challenges this year," says Xu Guanju, chairman of Zhejiang Federation of Industry and Commerce. "A number of factors such as costs, yuan appreciation, have worked together to impact the export-oriented sector."
More hope came in June when the China Banking Regulatory Commission (CBRC), the country's banking regulator, called for State-owned commercial banks to adjust their loan structure by serving more SMEs and giving priority to SME financing.
Following the move, the People's Bank of China, the central bank, raised all commercial banks' annual loan quotas to help fund the SMEs in earlier August. The increase was 5 percent for national commercial banks and 10 percent for local commercial banks.
The NDRC is also planning a bank to specialize in lending to SMEs in an effort to broaden their sources of finance, an official says at a recent forum held in Guangzhou.
What's more encouraging for Zhejiang province is that the CBRC is considering legitimizing its underground private lending, and setting up a limited amount of microcredit companies to connect private capital with SMEs.
Although an official timetable has yet to be released, it has been widely reported that the first group of private lenders could start issuing loans as soon as September.
The CBRC says these private firms can lend at interest rates not higher than an upper limit that has yet to be announced, and underground lending will become standardized and regulated.
By strengthening supervision, Zhejiang province expects to rule out the potential threats the previous underground lending poses, such as skewing the official interest rate and siphoning off deposits from banks.
The provincial government has also planned a 123.8-billion-yuan investment to boost industrial upgrading in Zhejiang. This is in line with the central government's decision to boost the development of the Yangtze River Delta, one of China's major economic engines.
The investment will go to 51 projects, which fall into six categories including eco-agriculture, high-tech industry, port-related industry, manufacturing, service industry, and the province's advantageous industries.
Although chances are slim that SMEs will benefit directly from the investments, which will be directed to industry leaders, experts believe the plan will optimize the overall industrial structure and create a sound environment for the future development of SMEs.
"In my point of view, it will not cause a crisis for SMEs, rather, it opens an opportunity for industrial restructuring, " says Cai Zhangsheng, head of the SME bureau of Zhejiang province.
