As the Spring Festival holiday approaches in January or February each year, many small Chinese factory owners treat their employees to banquets and raffles to reward workers for staying with the company for another year. But this winter, many bosses may be downsizing or canceling their celebrations as they register the effects of a prolonged economic chill.
Small and medium Chinese enterprises (SMEs) struggled last year. Since last April, the China Federation of Logistics and Purchasing’s small enterprise sub-index has remained below 50, indicating a slower rate of growth. Local governments have announced a variety of policies to support small businesses, including SME-specific funds, government purchasing, faster custom clearance, export-tax rebates and further cuts in administrative fees.
Yet it’s still unclear how much these policies have helped enterprises. China Economic Review talked to six people involved in small business in China to gauge how SMEs have fared and what their expectations are for the coming year.
Ms Zhang Hong, whose family runs a private company in Shanghai that supplies steel products to elevator makers
Business was much worse in 2012 than 2011. We used to make gross profit of RMB2,000 (US$319.8) on every ton of steel sold, but now it’s less than RMB500 (US$80) per ton. Also, customers now typically take three months to pay us, compared with one month before. The drop in the price of steel didn’t affect us much, but companies with large inventories were hit hard. A lot of companies have gone bankrupt. The pressure we face is that the number of competitors has increased significantly, resulting in price cuts and lower profit margins. Our clients are also recording very low profit margins, despite demand from government-backed affordable housing projects.
The situation will only worsen this year. We expect to see few or no profits, because the number of competitors continues to increase and clients have begun to ask suppliers to bid for contracts to further reduce costs, rather than placing orders with old suppliers directly. We are considering ending a long-time partnership with a major client to look for new investment opportunities and clients. This won’t be easy.
I don’t know what kind of supportive policies the government has introduced, but I don’t expect them to be helpful. Steel companies can’t get bank loans in general, and companies like us, investment companies by nature, have to use our homes as collateral. We used to raise capital among friends by paying higher interest rates when business was good, but now we have to rely on our own capital when we invest in new business prospects.
Mr Kong Qingtai, vice director of the China Association for Small & Medium Commercial Enterprises
Generally speaking, the situation was grim for SMEs last year and will be even grimmer this year. Small businesses face many problems, a major one being the difficulty of securing financing. Bank loans are not only hard to get, they have become unbearably expensive due to all sorts of other fees. Bank lending rates are only a little lower than rates offered by loan sharks, and the situation is pretty much the same with other financing channels. These capital shortages naturally cause businesses to contract. SMEs are either shutting down or cutting production, running half-days or less.
Well established SMEs that make high-tech products, or those with advantages in scale, technology or market share, have performed better. Banks are looking for these kinds of companies to issue their loans to. But recently launched high-tech startups are struggling. Export-oriented SMEs also saw their orders shrink significantly last year. I don’t think the situation will improve in the first half of 2013. The orders they received for the period were down more than 30% year-on-year, by my estimates.
The government has introduced policies to support SMEs, but so far they are just documents. They exist on paper but not in practice. Implementing them will be a long process, and they won’t be immediately effective or helpful.
Mr Xiao Feng, vice general manager of Alibaba Group subsidiary Shenzhen OneTouch Enterprise Service, which provides customs clearance, shipping, insurance and financing services to small and medium exporters
Our business has expanded quickly in recent years as SMEs have tried to reduce costs with the economic slowdown. Small foreign trade companies had and will continue to have a difficult time. The reason exports are in distress is not demand or products. Company owners tell me that demand is still there, but they find profits too low to take orders. Companies in labor-intensive industries, such as apparel, are in the toughest situation, while those in machinery and furniture are doing better.
The obstacles they face are becoming more and more obvious. SMEs have powered China’s growth in the past 30 years but had no financial leverage at all. Their costs have doubled yet they can get barely get loans. SMEs are left to their own devices. How can they grow? They are struggling on for a net profit of 1%, yet even that tiny return is disappearing.
Anthony Zhang, a Zheshang Securities employee who has helped some medical equipment producers list domestically
Medical equipment companies performed worse last year, due to both the slowing economy and government anti-graft measures. Many people in the medical profession were arrested for taking kickbacks last year. Doctors and hospital executives are scared, so they’ve stopped taking kickbacks for the moment and delayed purchases of medical equipment until this year and next year. So sales are more difficult.
Companies in the sector received a lot of development subsidies from the government, without which they might be running at losses. Government purchasing was also very helpful, and the government is approving research projects and grants and processing permits faster than for other sectors. Bank loans are also easy to get if companies can offer land or factories as collateral. Without collateral, getting loans is as difficult as for other sectors.
The macro environment last year was no better than in 2008, and SMEs in general performed poorly. Heavy taxes were a major problem. Few companies in the West can achieve a gross profit margin of 20%, but in China, half of our companies can’t even survive with a margin of 40-50%. They need to have margins 70-80% so as not to suffer losses after taxes. Right now, business tax, value-added tax and income tax account for around 40% of a company’s revenue on average, which encourages many private firms to dodge taxes.
Industry experts have been calling for tax cuts, but implementing that will be difficult. Cutting taxes would mean a decrease in government revenue and therefore a decrease in what they can do. Since the Chinese government wants to take charge of everything from what people eat to where they go to toilet, it will be difficult for big changes to happen. If significant tax cuts do come, that will help revive a lot of SMEs.
Ms Linda Wang, an officer in the corporate banking division of a foreign bank
The China Banking Regulatory Commission requires banks to keep the growth rate of loans for small and micro businesses on par with that for large enterprises. If banks work hard to approach those small companies, they can achieve this goal. Within the banking industry, we all know the implicit rule is that if your company is performing well, many banks will approach you to lend you money. So I don’t think that limited funding is the main issue for SMEs. Many of these companies are rife with management problems.
My team works primarily with property developers. We usually only lend to large property companies and try to avoid mid-sized property firms, due to concerns that government restrictions on house purchases may keep smaller compani
es from selling their developments. Right now we mostly provide housing development loans and mortgages after assessing the location of the development and the company’s scale and assets. We no longer offer unsecured loans. Small companies should not bother to apply for unsecured loans, since they won’t be approved anyway.
Mr Cha Li, founder of iStart Ventures, an early-stage investment fund for startups
The two primary constraints on the private sector are restrictive government regulations and a market that is dominated by large enterprises. The capital market isn’t open and SMEs are “struggling to survive in a crevice,” as the saying goes. SMEs in the service sector who need to rent storefronts are particularly suffering from the government’s real estate policy blunders. Compared to other countries, rent costs for small business owners in China exceed 50% of their total operational costs, which is ridiculous.
The real problem lies in that there is no opposition party in China to keep the ruling party in check. Of course new party leaders give grand speeches about supporting SMEs, but the mechanisms of the economy can’t change overnight. At least up until the 18th Party Congress, I hadn’t seen any substantial policies released to support SMEs. So far, SMEs don’t have any influence over policymakers. I am not surprised that once some businesspeople make some money, they choose to emigrate to other places like Canada. They earned their money with their sweat and blood, and they simply don’t know what will happen in China tomorrow.
There are three aspects the government could address to improve conditions for startups. The first is to break up monopolies, especially for sectors pertaining to public services. In these sectors small businesses have difficulty applying for a business license, but SOEs can obtain them without any trouble. Second, China’s registered capital requirements for SMEs are prohibitory. The value of a startup can’t be measured by their registered capital. Technically the minimum registered capital for a start-up in China is RMB30,000 (US$4,797). But companies can’t even open corporate bank accounts with that amount of money. Lastly, the tax burden on SMEs is too high, particularly for companies in the IT and creative sectors.