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China's SMEs now stranded in credit crunch

(China Daily)

10:57, September 30, 2011

In stark contrast to the rosy outlook for the Chinese economy, reports about the sudden disappearance of some business owners in Wenzhou has revealed a surprisingly gloomy picture for small and medium-sized enterprises (SMEs).

Without clear evidence of widespread closures among small businesses, Chinese policymakers certainly do not need to rush to put the brakes on the tightening measures they have adopted this year to fight rising inflation.

But that does not mean they can afford to continue ignoring the lack of bank loans for SMEs, which apparently have been hit particularly hard by measures to tighten borrowing.

For those who want to be bearish on China, intensifying financial troubles for some business owners in Wenzhou, China's SME heartland, will surely be taken as fresh evidence for their bet against the Chinese economy.

Amid rumors that a growing number of local entrepreneurs are having difficulty paying off loans from underground banks, which operate in a legal gray area, the alarmist talk that SMEs in Wenzhou may be on the brink of collapse is no wonder.

Though a full-blown crisis for China's SMEs may be still far from reality, recent cases in Wenzhou do justify close attention from policymakers on the financing difficulties of enterprises that were once the country's most vibrant.

In the face of mounting public criticism that major State banks have given too much credit to large State-backed companies, the banking sector has been quick to argue that it has not starved SMEs of loans as the country tries to fight inflation by tightening the reins on credit.

Outstanding loans to small firms grew 26.6 percent year-on-year to hit 9.85 trillion yuan ($1.55 trillion) at the end of July, and the growth was 10 percentage points higher than that of the banks' total outstanding loans.

Admittedly, such statistics indicate domestic banks have granted a somewhat bigger share of their loans to SMEs this year. But it does not touch upon the huge gap between actual bank loans and SMEs' financing needs or whether the banking sector has narrowed that gap.

More importantly, Chinese policymakers should be aware that SMEs' lack of financing is only the symptom but not the root cause of their difficulty surviving.

A widespread credit squeeze might have forced the SME sector to undergo the painful process of restructuring. But the big challenge for SMEs is how to absorb the climbing costs of labor, land and other resources as China's transformation of growth patterns accelerates.

Policymakers can again prove wrong those who are skeptical about its growth potential. But, first and at foremost, they must address the troubles facing SMEs.

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