2011-06-09 17:18

BEIJING -- New government measures that will create more financing opportunities for China's small businesses will provide aid in the short-term, but will not be a complete cure for the problems these companies face, according to some of the country's financial experts.

China's top banking regulator, the China Banking Regulatory Commission (CBRC), announced on Tuesday a series of measures aimed at boosting lending opportunities for small companies, which are often spurned by banks because of their financial riskiness.

The CBRC said in a statement on its website that it will permit higher bad loan ratios for banks that lend to smaller companies.

The regulator will also exclude loans below 5 million yuan ($771,000) when calculating banks' loan-to-deposit ratios, as long as those loans are given to companies with annual revenues of less than 30 million yuan. '

Soaring prices, tighter liquidity

The Ningbo Changheng Plastic Household Products Company, based in east China's Zhejiang province, is one small business that has gotten stuck between surging costs and tightened liquidity.

The company's general manager, Zhang Junjun, said that financing difficulties have made his company unable to handle large orders, which require large amounts of funding for the purchase of raw materials and the hiring of additional workers.

"The prices of everything, from rent to raw materials, electricity and wages, are all rising, except for prices for the products we are selling," said Zhang. Zhang said that he can't afford to pass rising costs on to consumers in the face of fierce competition from manufacturers in Vietnam and Bangladesh.

Wages are one area where China's small businesses are struggling to keep up. Government statistics show that in most Chinese cities, monthly wages are rising by an average of 20 percent annually, as workers are demanding higher pay to cover rising living expenses.

Surging costs, the appreciation of the yuan and decreasing orders from overseas are causing Zhang's company, as well as many others in China's manufacturing belt, to struggle to stay profitable, said Wang Peng, a researcher from the Beijing-based China Center for International Economic Exchanges (CCIEE).

Monetary tightening measures implemented by the government to combat inflation have also made conditions worse for small companies, Wang said.

After raising the reserve requirement ratio for commercial banks eight times since October 2010, Chinese authorities locked up a record high of 21 percent of bank deposits that would have otherwise been lended.

Financing for small- to medium-sized companies has been more difficult this year, as overall monetary conditions have been tightened, according to a report released by the Ministry of Industry and Information Technology (MIIT) earlier this month.

Two interest rate hikes earlier this year have pushed up the cost of borrowing for small businesses by at least 13 percent, according to the MIIT report.

Measures taken to combat risks

Small businesses, which create 80 percent of China's jobs and generate 60 percent of the country's industrial output, have long complained about difficulties in securing loans from banks, which prefer to lend to large companies that are considered safer bets.

Loans to small firms are characterized by small amounts, complex application procedures and unimpressive profits, said Zheng Xin, an official in charge of SME (small and medium enterprises) affairs with the MIIT.

The non-performing-loan (NPL) ratio for loans to small firms stood at 2.61 percent, compared with the banking sector's average NPL ratio of 1.1 percent, at the end of March, CBRC data showed.

The banking regulator said in Tuesday's statement that differentiated supervision of NPL ratios will be applied to loans to small businesses.

In addition, banks that dedicate a certain proportion of their total corporate loans to small businesses will be given priority to issue bonds earmarked for granting loans to small business, the CBRC said.

Guo Tianyong, a professor at the Beijing-based Central University of Finance and Economics, said the measures will help increase banks' capital adequacy ratios, which will ease refinancing pressure for small firms.

The measures will encourage banks, especially small to medium-sized lenders, to extend more credit to small businesses, which will also help banks to improve their own profit margins, Guo said.

Problems beyond financing

However, economists said the difficulties facing many of China's small businesses go far beyond financing.

For many small businesses, financing shortages are just a symptom of a deeper problem, said Wang, adding that "these companies are not as competitive as before, due to rising costs."

China's manufacturers have long enjoyed low production costs, but as the yuan continues to appreciate, the prices of raw materials and labor will rise accordingly, Wang said.

Wang suggested the government should work to encourage small businesses to focus on moving up the value chain and raise the quality of their products.

Lian Ping, chief economist with the Bank of Communications, said "it is not right to put all the blame on banks. Actually, most of the difficulties that small businesses face are the result of the way those companies are managed."

The growth of small businesses is a complex issue that will require efforts from various sectors, not just banks, Lian said.

Although some have cited bankruptcy rates for small firms as a reason for banks to lend a hand, some of these bankers consider the bankruptcies to be a warning.

"Some small firms go broke because their risks get out of control while they are borrowing too much from banks," said Zhou Bin, general manager of the retail banking department of the China Minsheng Banking Corporation.

The CBRC has taken these risks into account, as its new measures apply to loans of less than 5 million yuan, Zhou said.