Given widespread reports that ¬Chinese small- and medium-sized enterprises are facing bankruptcy due to credit tightening, China Economic Review informally surveyed a selection of SME managers in Dongguan in Guangdong, Wenzhou and Hangzhou in Zhejiang, and two in cities in the interior: Wuhan in Hubei and Xi’an in Shaanxi.
Jason Long, owner and general manager of Bright Star Manufacturing, which makes components for the auto and telecom sectors with a sideline in pharmaceuticals
Our small companies are in urgent need of money for new product development and production expansion. Most firms opt for inter-company funding, borrow from relatives and friends, or use property to obtain a mortgage. Only a few choose to borrow from a guarantee company [a class of private lender] due to their high interest rates, which are typically 15-20% or higher.
Although the government has said it will help SMEs, there are few practical policies to support us. Companies that have been relying on bank lending for a long time may face the risk of closure. The companies which have adapted to growth without borrowing from banks will be fine. The Chamber of Commerce in Dongguan has not been as successful in helping its member companies get funds as those in Zhejiang and Fujian provinces. I would only opt for bank lending if the risk is low. I estimate that less than 50% of SMEs in Dongguan lack money. A labor shortage has forced around 30% of all companies in Dongguan to operate at half capacity.
Owner of a bathroom cabinet manufacturing company with 55 employees based in Hangzhou
I get funding through relatives and friends. I also borrow money from banks for production and operation. SMEs in the bathroom product sector in Hangzhou often borrow a small amount of money through mortgage loans. The average interest rate is around 10%. Private lending in the city is not common. I am not worried that tight credit will cause our company to shut down but it will slow our development. Strict loan guarantee conditions are the toughest issue we have to face now. Bank lending is getting tighter. However, bank lending is not the only reason SMEs are struggling with development. Banks are profit-oriented and they choose the companies which have potential. Since there is a high risk that banks won’t profit much from lending to SMEs, it is natural that SMEs have problems with borrowing. Hangzhou Enterprise Guarantee, a state-owned company, helps some companies with patents and financing by lowering mortgage requirements, but our industry does not enjoy any such privileges here. And I think only a few companies can meet the standards.
Yang Bo, general manager at CIIC Education International Xi’an, with 40 employees
Because we provide overseas education services, customers pay in advance and we use this money to maintain business operations. At present, 80% of companies operate with debt. Though we do not need to borrow money, many SMEs face tough funding problems, mainly because they are not able to obtain mortgages. Some seek help from friends and relatives but the amount they are able to borrow is usually less than RMB10,000. Others ask their local chamber of commerce or other organizations for funding. The amounts lent can be between RMB5 million and RMB10 million. Although the Chinese bank lending model is not mature, I still prefer to apply for bank funding because the interest rate is around 9%, while at other organizations it is above 10% and the risk is higher.
Mr Wang, managing director at Wuhan Roafe Sanitary Wares, with 50 employees
I prefer bank funding, which is safer, or guarantee company loans, which are issued in cooperation with banks. Traditionally, however, we have higher trust in banks. If I need less than RMB100,000, I ask relatives or friends for help. The interest rate in banks is around 7.6% in Wuhan while at guarantee companies it is higher.
I borrow money to open more stores, buy more inventory and launch more commercial events. Our company is at risk of stagnating development due to bank lending difficulties. For instance, capital flows will be lower, inventory is likely to decrease and I may not be able to launch more promotional activities or open more stores. I think many SMEs, especially those who are not familiar with alternative ways of capital management, will be forced to shut down. Wuhan currently does not have an association to cooperate with banking institutions to help SMEs. However, I heard the Qianzhou Chamber of Commerce in Hubei was planning to borrow RMB100-200 million from the Agricultural Bank of China, but it seems the two parties did not reach an agreement. The main issue is that there is no clear and standardized audit mechanism yet.
Hu Minghuan, information ¬manager at Wenzhou HEC Fashion International
We have enough money so we use our own capital and put property up as collateral. The money is used for trading, manufacturing, buying land and building new factories.
I think a few inefficient companies with insufficient capital and high operational costs will go bankrupt in the face of tight credit. In Wenzhou, corporate funding often comes from banks, but money for personal investment often comes from relatives and friends, with the maximum amount borrowed around RMB10,000. The worst solution is to borrow from a guarantee company because the interest rate is very high. The stricter guarantee standard is currently the main difficulty in terms of bank lending. Because of tough bank regulations we would likely lose orders, delay factory expansion, or have to cut staff salaries.
Fortunately, there are large amounts of private capital flows in the city as well. In my opinion, the most effective way of financing is borrowing from friends or relatives. Cooperation between associations and banking institutions is still new in Wenzhou – it appeared two years ago. I think tight credit is not the reason why 50% of all companies in Zhejiang are operating at half capacity. The main reasons are decreased orders and higher costs.