Govt denies mass SME bankruptcy

13:25, July 22, 2011      

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The Ministry of Industry and Information Technology acknowledged Thursday that small- and medium-sized enterprises (SMEs) face serious financing difficulties after the government tightened liquidity, but rejected claims of a wave of SME bankruptcies.

"Based on our studies, the reported mass bankruptcy of SMEs in some provinces along the east coast was not true," said Zhu Hongren, chief engineer and spokesman for the ministry.

However, the tightened credit policy, soaring raw material prices and rising labor costs do make lives for SMEs more difficult, and relevant departments and local governments need to actively help these companies for the sake of social stability, Zhu said.

Zhu's remarks came a day after the Provincial Bureau of Statistics of Zhejiang, one of China's eastern economic powerhouses, denied a wave of SME bankruptcies in the province.

In the first four months of this year, 7,306 SMEs in Zhejiang cancelled their registrations, but the number of new SMEs registered was about 45,000, the data showed.

Earlier this month, the SME Bureau of Guangdong Province released data showing that in the first quarter, the number of non State-owned businesses in the province increased by 3.5 percent year on year, and the number of domestic private firms increased by 14.7 percent.

"To say there has been a bankruptcy wave of SMEs is exaggerating," Xu Biao, an economist with China Merchants Bank in Shenzhen, told the Global Times. "But the risk is still there if the difficulties facing those SMEs cannot be addressed, and the global economic recovery continues to slow down."

In June, the People's Bank of China raised the reserve ratio requirement by half a percentage point, forcing big banks to put aside 21.5 per cent of their deposits, a record high, and locking up funds that could otherwise be loaned out, thus fuelling inflation.

A recent study by the Economic and Trade Commission of Wenzhou, Zhejiang Province, showed that only 57.4 percent of SMEs are seeing their financing demands met, and more than 42.9 percent are under financial pressure.

About 88 percent of SMEs in Shenzhen are under financial strain, and 57 percent are encountering financing difficulties, the Southern Metropolis Daily reported Thursday, citing local government data.

"While further tightening liquidity, the government should also adopt a more flexible credit policy for SMEs, especially for those companies with good sustainability and prospects," Zhang Wenkui, deputy director of the Enterprise Research Institute under the Development Research Center of the State Council, told the Xinhua News Agency.

Analysts also warned that financing difficulties had forced many SMEs to turn to microlending, whose excessive rate led to many of the bankruptcies.

Recent research by the Administration for Industry and Commerce in Wenzhou showed that 23 microlending companies in the city have a total registered capital of 5.22 billion yuan ($ 809.14 million). They also have total bank loans of 2.51 billion yuan.

According to the China Economic Weekly, the annual rate of microlending in Zhejiang has reached 100 percent, compared with many SMEs' turnover ratio of less than 10 percent a year.

Meanwhile, the National Bureau of Statistics released data Wednesday showing that 88.7 percent of the 269 sampled enterprises in Shenzhen experienced a price hike in raw materials, with an average rise of 10 percent.

The price of certain materials surged by as much as 60 percent, according to the data.

"I had to raise prices after mounting labor costs and rising costs for raw materials since last year, because of which I lost a lot of business. Many foreign companies have gotten used to our cheap prices, but that era has gone," an owner of a clothing company in Wenzhou surnamed Ji told the Global Times.

SMEs in China are also coming under growing pressure from rising labor costs, particularly those in the manufacturing sector, Lu Ting, China economist at Bank of America-Merrill Lynch in Hong Kong, told the Global Times.

According to government figures, a total of 27 provinces and cities raised their minimum salaries in 2010. In March, Guangdong raised its minimum monthly payment to 1,300 yuan from 1,030 yuan last year.

"China's labor intensive SMEs will gradually become more capital intensive and more reliant on machines, which could substantially raise productivity," Lu said, adding that the number of SMEs will gradually diminish.

Agencies contributed to this story.

Source: Global Times
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