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Thursday 16 October 2008
China’s Smaller Firms Hit Hard by Global Credit Crisis, Weaker Economy
China has rolled back on its tight money policies but the move may be too late for many of the nation’s small and medium-sized enterprises (SMEs), hit hard by a deepening credit crisis and weakening global markets, analysts said. PDF
China’s Smaller Firms Hit Hard by Global Credit Crisis, Weaker Economy
By Randall Jensen 15 October 2008
(XFN-ASIA) - China has rolled back on its tight money policies but the move may be too late for many of the nation’s small and medium-sized enterprises (SMEs), hit hard by a deepening credit crisis and weakening global markets, analysts said.
Despite still strong economic growth overall, a combination of domestic lending curbs, rising material costs and a global financial crisis is pushing many of the nation’s smaller firms to the brink.
“Although the central bank has started to loosen the credit controls, banks are growing more unwilling to lend money to companies, especially SMEs, which usually have weaker bargaining power, due to the high risks from the current economic crisis,” said Wu Feng, a strategist with TX Investment Consulting Co in Shanghai.
Chinese government statistics showed that about 67,000 SMEs went bankrupt in the first half of this year, according to state media.
It is a problem the country cannot afford to take lightly. The value of products and services created by SMEs accounts for 60 pct of China’s gross domestic product while these companies also contribute about 50 pct of the government’s tax revenue, according to the Shanghai-based National Business Daily.
SMEs received just 300 bln yuan in credit in the January to March period, 30 bln yuan less than a year ago and just 15 pct of the total credit extended during the quarter, according to regulatory data.
The credit strains have become obvious among companies listed offshore, where there is generally more transparency. Singapore, which has a high concentration of SMEs, has seen several cases come to light in a very short period of time.
Just last week, Singapore-listed FerroChina, a maker of finished steel products, said it would be unable to repay or reschedule 706 mln yuan in loans as a result of the current global crisis. It also said it has some 4.5 bln yuan in other debts that could fall due.
The company had to shut plants, and analysts said it may face liquidation.
Late yesterday, a Singapore-listed water treatment firm, Bio-Treat Technology, restated its results for the year to June to show a 413.9 mln yuan loss instead of a net profit of 125.4 mln, blaming the change largely on problems with receivables due to customer credit strains.
“Certain customers have no access to funding currently and have suddenly found themselves to be in a dire financial state,” the company said.
Fellow Singapore-listed firm China Printing & Dyeing suspended trading in its shares last week and revealed that it could not locate its CEO or deputy CEO. The Chinese operating arm of the textile dyeing company is unable to repay debts that could reach 2 bln yuan, according to mainland China news media.
“Most of the S-chip companies are in an expansion period. That’s why they need more money and are involved in the short-term debt problems,” said Goh Mou Lih, head of research at Westcomb Securities in Singapore.
S-chips are China companies listed in Singapore - and most of them are SMEs.
“Due to the global financial crisis, banks are not allowing these companies to defer the loan payments. It is also getting harder for these companies to get further loans. So it is really a tough time.”
The strains may be worse for unlisted SMEs that have not had access to public funding.
China Feiyue Group, a sewing machine manufacturer based in east China’s Zhejiang province, incurred debts reaching nearly 1.8 bln yuan, which included loans from a number of state-owned banks, Caijing magazine has reported. It said the company was facing possible liquidation.
Zhejiang Zhonggang Property Development, a real estate company also based in Zhejiang province, is unable to locate its controlling shareholder or legal counsel, the National Business Daily reported today.
The report said the company has some 130 mln yuan in bank loans and other debt that may be due. Officials failed to turn up for work after the weeklong national holiday early this month.
The problems have also been concentrated in - though not limited to - the key export areas such as south China’s Guangdong province and east China’s Jiangsu and Zhejiang provinces.
They also have hit a number of sectors particularly hard, from textiles to toys and footwear. The official Xinhua news agency said yesterday that more than half of China’s toy exporters went bust in the first seven months of this year due to rising production costs, a stronger yuan and tightened safety standards in export markets.
A total of 3,631 enterprises that made toys for export, or 52.7 pct of all such businesses, closed their doors, the news agency said, citing a report by the General Administration of Customs.
China is the world’s largest toy producer and exporter, and much of that production is based in Guangdong, Zhejiang and Jiangsu.
Citigroup said it does not see any imminent danger of a financial crisis in China, but a cyclical deterioration in credit quality looks unavoidable as property prices fall and exports and the domestic economy slow.
China needs to ensure continued growth and keep inflation under control to cushion the impact of the global financial crisis, but it has not suffered the kind of turmoil faced by the advanced economies as yet, according to Liu Erh-fei, managing director and chairman for China at Merrill Lynch.
The Chinese government has made an effort to reverse the weakening trend.
In early August, China bumped up the credit quota for national banks and regional lenders. The China Banking and Regulator Commission urged banks to use the higher quotas to help SMEs over their financial hurdles.
Earlier this month, China slashed the benchmark lending rate for the second time this year and it cut the bank reserve requirement for a second time, freeing up funds for lending. The central bank had raised the reserve requirement six times previously this year – while it was in its monetary tightening phase.
The government’s actions have not yet meant much relief for SMEs yet.
“We may see more impact in fourth-quarter earning reports. The financing shortage is still severe (for SMEs),” said Wu Dazhong, an analyst with Shenyin & Wanguo Securities in Shenzhen.
“The government support so far for SMEs is insufficient. The government should move faster in further cutting in interest rate cut and banks reserve ratios to meet financing needs.”
More help is likely to be on the way.
Merrill Lynch said in a note to investors last week that the central bank probably will cut interest rates two or three more times this year and again in 2009 as it tries to maintain economic growth amid the global financial crisis.
“We expect a sweeping change of policy stance, including interest rate and reserve requirement cuts,” it said.
But analysts said they need to see that trickle down to the SMEs. If credit is available and not extended to smaller firms, the SMEs will still be hurting.
And if there is any trickling, they added, it needs to trickle faster.
1 comment:
China’s Smaller Firms Hit Hard by Global Credit Crisis, Weaker Economy
By Randall Jensen
15 October 2008
(XFN-ASIA) - China has rolled back on its tight money policies but the move may be too late for many of the nation’s small and medium-sized enterprises (SMEs), hit hard by a deepening credit crisis and weakening global markets, analysts said.
Despite still strong economic growth overall, a combination of domestic lending curbs, rising material costs and a global financial crisis is pushing many of the nation’s smaller firms to the brink.
“Although the central bank has started to loosen the credit controls, banks are growing more unwilling to lend money to companies, especially SMEs, which usually have weaker bargaining power, due to the high risks from the current economic crisis,” said Wu Feng, a strategist with TX Investment Consulting Co in Shanghai.
Chinese government statistics showed that about 67,000 SMEs went bankrupt in the first half of this year, according to state media.
It is a problem the country cannot afford to take lightly. The value of products and services created by SMEs accounts for 60 pct of China’s gross domestic product while these companies also contribute about 50 pct of the government’s tax revenue, according to the Shanghai-based National Business Daily.
SMEs received just 300 bln yuan in credit in the January to March period, 30 bln yuan less than a year ago and just 15 pct of the total credit extended during the quarter, according to regulatory data.
The credit strains have become obvious among companies listed offshore, where there is generally more transparency. Singapore, which has a high concentration of SMEs, has seen several cases come to light in a very short period of time.
Just last week, Singapore-listed FerroChina, a maker of finished steel products, said it would be unable to repay or reschedule 706 mln yuan in loans as a result of the current global crisis. It also said it has some 4.5 bln yuan in other debts that could fall due.
The company had to shut plants, and analysts said it may face liquidation.
Late yesterday, a Singapore-listed water treatment firm, Bio-Treat Technology, restated its results for the year to June to show a 413.9 mln yuan loss instead of a net profit of 125.4 mln, blaming the change largely on problems with receivables due to customer credit strains.
“Certain customers have no access to funding currently and have suddenly found themselves to be in a dire financial state,” the company said.
Fellow Singapore-listed firm China Printing & Dyeing suspended trading in its shares last week and revealed that it could not locate its CEO or deputy CEO. The Chinese operating arm of the textile dyeing company is unable to repay debts that could reach 2 bln yuan, according to mainland China news media.
“Most of the S-chip companies are in an expansion period. That’s why they need more money and are involved in the short-term debt problems,” said Goh Mou Lih, head of research at Westcomb Securities in Singapore.
S-chips are China companies listed in Singapore - and most of them are SMEs.
“Due to the global financial crisis, banks are not allowing these companies to defer the loan payments. It is also getting harder for these companies to get further loans. So it is really a tough time.”
The strains may be worse for unlisted SMEs that have not had access to public funding.
China Feiyue Group, a sewing machine manufacturer based in east China’s Zhejiang province, incurred debts reaching nearly 1.8 bln yuan, which included loans from a number of state-owned banks, Caijing magazine has reported. It said the company was facing possible liquidation.
Zhejiang Zhonggang Property Development, a real estate company also based in Zhejiang province, is unable to locate its controlling shareholder or legal counsel, the National Business Daily reported today.
The report said the company has some 130 mln yuan in bank loans and other debt that may be due. Officials failed to turn up for work after the weeklong national holiday early this month.
The problems have also been concentrated in - though not limited to - the key export areas such as south China’s Guangdong province and east China’s Jiangsu and Zhejiang provinces.
They also have hit a number of sectors particularly hard, from textiles to toys and footwear. The official Xinhua news agency said yesterday that more than half of China’s toy exporters went bust in the first seven months of this year due to rising production costs, a stronger yuan and tightened safety standards in export markets.
A total of 3,631 enterprises that made toys for export, or 52.7 pct of all such businesses, closed their doors, the news agency said, citing a report by the General Administration of Customs.
China is the world’s largest toy producer and exporter, and much of that production is based in Guangdong, Zhejiang and Jiangsu.
Citigroup said it does not see any imminent danger of a financial crisis in China, but a cyclical deterioration in credit quality looks unavoidable as property prices fall and exports and the domestic economy slow.
China needs to ensure continued growth and keep inflation under control to cushion the impact of the global financial crisis, but it has not suffered the kind of turmoil faced by the advanced economies as yet, according to Liu Erh-fei, managing director and chairman for China at Merrill Lynch.
The Chinese government has made an effort to reverse the weakening trend.
In early August, China bumped up the credit quota for national banks and regional lenders. The China Banking and Regulator Commission urged banks to use the higher quotas to help SMEs over their financial hurdles.
Earlier this month, China slashed the benchmark lending rate for the second time this year and it cut the bank reserve requirement for a second time, freeing up funds for lending. The central bank had raised the reserve requirement six times previously this year – while it was in its monetary tightening phase.
The government’s actions have not yet meant much relief for SMEs yet.
“We may see more impact in fourth-quarter earning reports. The financing shortage is still severe (for SMEs),” said Wu Dazhong, an analyst with Shenyin & Wanguo Securities in Shenzhen.
“The government support so far for SMEs is insufficient. The government should move faster in further cutting in interest rate cut and banks reserve ratios to meet financing needs.”
More help is likely to be on the way.
Merrill Lynch said in a note to investors last week that the central bank probably will cut interest rates two or three more times this year and again in 2009 as it tries to maintain economic growth amid the global financial crisis.
“We expect a sweeping change of policy stance, including interest rate and reserve requirement cuts,” it said.
But analysts said they need to see that trickle down to the SMEs. If credit is available and not extended to smaller firms, the SMEs will still be hurting.
And if there is any trickling, they added, it needs to trickle faster.
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