A powered-off workshop is seen empty in Wenzhou, east China’s Zhejiang Province, June 30, 2011. © Xinhua

By Wang Guanqun

BEIJING, Oct. 10 — China’s small businesses turned to be the first to ring the alarm as the country is walking a fine line between fighting inflation and maintaining growth.

Some entrepreneurs have disappeared and others have jumped off buildings almost every week since April in Wenzhou City, an entrepreneurial capital in eastern China’s Zhejiang province, Xinhua reported.

The sudden disappearance of the business owners has revealed a surprisingly gloomy picture for the small and medium-sized enterprises (SMEs) in China.

RUNAWAY BOSSES

According to a Xinhua investigation, at least 80 cash-strapped businesspeople in Wenzhou have skipped town or declared bankruptcy to invalidate more than 10 billion yuan (1.6 billion U.S. dollars) in debt.

Just last month, two local entrepreneurs in Wenzhou killed themselves by jumping off the buildings and another broke his leg in a similar suicide attempt.

The tragedies in Wenzhou are extreme cases of private SMEs struggling to survive a liquidity crunch amid the country’s macro control policies set to curb inflation and cool down the over-heated property market.

In Wenzhou, one-fifth of the 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city’s council for small and medium-sized enterprises.

Of the 855 companies surveyed by the Wenzhou Economic and Information Commission, more than 76 percent said they are almost out of money and are struggling to continue production.

But many cash-strapped firms are unable to borrow money from banks, and some have turned to China’s underground lending market to pool money from individuals and firms.

The steep rates of the informal loans pushed some businesses to the brink of collapse.

MONETARY TIGHTENING

To curb soaring inflation, the People’s Bank of China (PBOC), the country’s central bank, has raised banks’ reserve requirement ratio six times this year and hiked interest rates three times in a bid to check excessive lending.

China’s benchmark interest rate of one-year deposits currently stands at 3.5 percent and banks have to set aside 21 percent of their deposits as reserves, mopping up about 2.1 trillion yuan (235 U.S. dollars) of liquidity otherwise available for lending.

The tightening monetary policies have bitten into China’s small businesses which create 80 percent of the nation’s jobs and generate 60 percent of the industrial output, but have difficulty securing bank loans.

Outstanding loans to small firms grew 26.6 percent year-on-year to hit 9.85 trillion yuan (1.55 trillion U.S. dollars) at the end of July, rising faster than the total outstanding loans of Chinese banks, said Xiao Yuanqi, an official from the China Banking Regulatory Commission (CBRC), late last month.

“But it (the statistics) does not touch upon the huge gap between actual bank loans and SMEs’ financing needs or whether the banking sector has narrowed that gap,” China Daily commented in an editorial.

The informal lending market between companies and individuals, which operates outside the banking industry, became a last resort for many private entrepreneurs facing a cash squeeze.

UNDERGROUND LOAN MARKET

The gap between small firms’ financing needs and the credit crunch bloomed Wenzhou’s informal lending market.

Currently, there are 186 guarantee firms, 1,088 investment companies, 431 consignment stores and 48 pawnshops in the city, data from local government departments showed.

Outstanding high-yield loans issued in the informal lending market currently totaled 110 billion yuan in Wenzhou, according to data from the PBOC’s Wenzhou branch.

And the informal loan rates are staggering. According to the PBOC’s Wenzhou branch, the composite annual interest rate in the city’s informal lending market hit a record 25.09 percent by the end of August, compared with the banking sector’s benchmark one-year lending rate of 6.56 percent.

The high rate drove the local residents in Wenzhou to lend on the informal market rather than to banks.

The PBOC estimated the market was worth 2.4 trillion yuan as of the end of March 2010, or 5.6 percent of China’s total lending.

Lian Ping, chief economist with the Bank of Communications, told Xinhua it is easy for those dealing with the informal lending market to fall into a vicious circle by taking on new debts to repay old ones, considering the system’s similarity to a Ponzi scheme.

“If there is no new funding to support such expectations, the system will collapse and creditors will suffer huge losses,” Lian said.

PREMIER’S CALL

To address the small businesses’ financing need, Chinese Premier Wen Jiabao paid a visit to Zhejiang province on Oct. 3 and Oct. 4.

Premier Wen said small enterprises should be a priority for bank credit support and enjoy more preferential tax policies.

Banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit, the premier said.

He also said bank support for small businesses must follow market principles and avoid too much administrative intervention in order to check moral hazards.

Wen said private lending activities should be better guided and regulated in order to play a positive role in boosting the country’s economy.

“Effective measures should be taken to contain the trend of usury, crack down on illegal fundraising and properly handle the problems of collateral and capital shortage in order to prevent risks from spreading and evolving on a regional scale,” he said.

“Small businesses play an irreplaceable role in creating jobs and boosting economic growth,” said Wen.

“It is of overall and strategic significance to support their development,” Wen added. 

On Xinhua Web site: http://news.xinhuanet.com/english2010/china/2011-10/10/c_131181749.htm