CHENGDU / SHANGHAI - The Chinese government's efforts to support small and medium-sized enterprises (SMEs) while simultaneously tightening its monetary stance to curb inflation have been working, but the situation is still not optimistic, according to officials and entrepreneurs.

Jin Deben, executive deputy-secretary-general of the Chinese Association of SMEs, said on Monday that businesses are facing unprecedented challenges, and difficulties in obtaining financing remain prevalent.

"The central bank's interest rate hikes have further increased the costs for enterprises to obtain money for sustainable operations. On average they are borrowing at interest rates of more than 13 percent," Jin made the remarks at an SME forum organized by China Construction Bank Corp (CCB) in Chengdu, Sichuan province.

Dong Xian'an, chief economist at Peking First Advisory Co Ltd, said SMEs are now facing operational difficulties caused by tight monetary policies. Controls on the credit quotas of commercial banks and rises in both interest rates and reserve-requirement ratios have come as one shock after another to the SMEs, he said.

To soak up liquidity and curb inflation, the central bank has raised interest rates three times and increased the reserve-requirement ratio for commercial lenders six times this year. But consumer inflation rose stubbornly by 6.4 percent year-on-year in June, a three-year high.

"Small enterprises are suffering from a worse situation than that seen at the same time last year," said Dong.

China's official purchasing managers' index, a key gauge of manufacturing activity, fell for a fourth straight month in July to a 29-month low of 50.7. Meanwhile, growth in China's service sector slowed for a second successive month during July, according to data from HSBC China Services.

"The majority of SMEs are facing severe financial problems, especially as production far exceeds market demand," said Zhang Feng, manager of Zhejiang Chuangdian Craft Co Ltd. "At the same time, inflation has resulted in a dramatic increase in the price of material, office rents, and salaries," said Zhang.

His company's total sales in the first half declined nearly 50 percent compared with the same period last year, while international orders decreased by 70 percent and domestic orders fell 20 percent.

Jin said about 43 percent of enterprises in Wenzhou, Zhejiang province have cashflow problems.

To square the circle of curbing inflation while sustaining economic growth, the central bank and the National Development and Reform Commission have highlighted the necessity of encouraging financial institutions to support small and medium-sized enterprises while controlling total credit.

In June, the China Banking Regulatory Commission announced a series of policies to encourage loans to small-scale enterprises, including a lower risk weighting when calculating capital-adequacy ratios, the exclusion of loans in calculations of lenders' loan-to-deposit ratios, and urging banks to have a higher tolerance for non-performing loans related to small enterprises. Major lenders in China have responded positively to the call to lend more to SMEs. Yu Jiang, head of the SME sector at CCB, said the bank's loans to SMEs in the first half accounted for 68 percent of its total new-yuan lending. In the past three years, the bank's lending to SMEs has grown by 40 percent on average.

However, Zhang Jianhua, chief financial officer of Sichuan Hengtong Basalt Mining Co Ltd, said he has seen little substantial improvement since the policies were published.

Di Na, inspector of the SME department at the Ministry of Industry and Information Technology, said implementation of the policies should be better supervised and more detailed measures are required.

China Daily

(China Daily 08/09/2011 page16)