Wang Yi, who employs 300 people making children's raincoats on China's east coast, is worried his company won't survive the next year as exports dry up. The apparel manufacturer, which supplies European supermarket chains Tesco and Aldi Group, needs a 600,000 yuan (HK$683,100) loan by January 31 to stay afloat. State-owned banks rejected his previous applications.
"There's no point trying them again," said Wang, standing in his two- story factory in Pinghu, about 90 kilometers southwest of Shanghai, where one floor is half empty. "They prefer big customers."
China's largest banks, with 4 trillion yuan of cash, are resisting government efforts to boost lending to 42 million small and medium-sized companies that drove the economic boom of the past decade.
The central bank on November 2 scrapped curbs on loans after three interest rate cuts in seven weeks failed to revive economic growth, which has sagged to its slowest in five years.
Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government statistics.
Companies with assets of less than 40 million yuan provide three-quarters of urban jobs and 60 percent of China's gross domestic product. "Their failure will lead to unemployment and may threaten social stability," said Frank Gong, Hong Kong-based chief China economist at JPMorgan Chase.
After five years of economic growth above 10 percent, the rate may slow to 5.8 percen
t this quarter, according to a November 3 estimate by Credit Suisse Group.That would be the lowest rate since at least 1994, according to data compiled by Bloomberg.
In its latest move to reverse that trend, China's central bank said on November 2 it would no longer cap commercial bank lending, Xinhua News Agency reported, scrapping a limit imposed last year to prevent the economy from overheating.
In August the People's Bank of China raised the quota by 5 percent to 3.8 trillion yuan, directing lenders to funnel the additional funds to firms with assets of less than 10 million yuan and farmers.
Banks have so far turned a deaf ear. With delinquency rates on loans to small companies running almost four times those of other loans, they want to avoid the state-directed lending that led to a US$500 billion (HK$3.9 trillion) government bailout over the past decade.
"It's wishful thinking for the government to try to talk banks into lending to stimulate the economy," said Li Qing, a Shanghai-based analyst at CSC Securities HK.
"Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures."
Nationwide, loans to small businesses by China's 20 biggest lenders rose 6.2 percent to 3.2 trillion yuan in the first six months this year, less than half the 14.1 percent growth in overall lending, according to the China Banking Regulatory Commission.
In Zhejiang province, where Wang is based and 99 percent of companies are small and privately owned, loans are increasingly hard to come by.
Industrial and Commercial Bank of China, the nation's largest, offered 5 billion yuan of new loans to small enterprises in the province during the first six months of 2008, less than half the year-earlier figure, according to the lender.
"Getting a loan takes longer and involves more procedures for small companies," said Wang, who is being squeezed by a 20 percent dip in sales as well as higher commodity prices and an appreciation of the yuan, which reduces revenue from exports.
"Every line of business I know is scaling back to preserve capital, as survival is the most important thing," he said. "The whole mess in the US and Europe means 2009 will be worse."
Banks are reluctant to reverse the tightening of risk management that was carried out with advice from foreign investors, including Goldman Sachs Group, that have paid US$21 billion for stakes in mainland lenders since 2005.
"Chinese banks are getting smarter and they won't blindly follow lending directives from the top anymore," said Leo Gao, who helps oversee the equivalent of US$2.3 billion at APS Asset Management in Shanghai.
"We've seen banks start to cut back loans to real estate and exporters since the second quarter as they know an outbreak of bad loans is on the horizon."
Bank of China reformed its credit policies with help from Temasek Holdings, which owns a 4.1 percent stake.
The bank now asks borrowers for more documents to prove they have orders that will provide revenue to repay a loan, as well as more collateral and third-party guarantees.
It also has moved decision-making from local branches to centralized units at provincial headquarters.
Lending to smaller companies is "challenging," because each loan uses the same resources as are required to serve bigger corporations, reducing returns on these higher-risk transactions, said Wang Zhaowen, a Beijing-based spokesman for the bank.
"It's a dilemma and we are trying to find a way out," he said. "Never again will we lower lending standards to meet government directives. Otherwise, we just slip back to the old path."
About 8.5 percent of the bank's advances to small and medium-sized companies were at least 90 days overdue on June 30, compared with 2.6 percent of total lending.
Decades of state-directed lending left China's four biggest banks with bad loans equal to almost 40 percent of outstanding loans in 1998.
They were still sitting on US$171 billion of soured debt, or 6.1 percent of total advances, at the end of June, compared with 0.5 percent for international banks in China.
"Banks will pay a heavy price for being good corporate citizens," said Dorris Chen, a Shanghai-based analyst at BNP Paribas. "And they alone can't keep these companies from failing."
Some banks that specialize in dealing with smaller firms are already feeling the pinch. China Minsheng Banking, the nation's first privately owned bank, said overdue loans increased 22 percent in the first half from the end of last year.
Factory owner Wang is now trying the Pinghu city cooperative bank, a regional lender whose interest rates are as much as 20 percent higher than state banks.
He doesn't think he'll need to try the last resort, a loan shark who charges four times that. "With all the policies on easing lending, I'm optimistic," he said. Even if I get it, next year is going to be tough."
