China’s small businesses feeling the squeeze
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China’s small businesses feeling the squeeze

By Tom Hancock

Dual pressures on private businesses in China from rising costs and tighter monetary policies from Beijing are highlighted in two reports from the Chinese-language 21st Business Herald.

According to one report, the number of cigarette lighter manufacturers in the southern Chinese city of Wenzhou has fallen from a peak of 4,000 at turn of this century to just 100 today. Wenzhou is responsible for 90% of the world’s cigarette lighter manufacturing.

Costs of raw materials and wages have risen in the last two years, with the cost of zinc, an essential ingredient in lighter production, tripling in price over the last two years, while labor costs are rising at a rate of 20% annually, according to the article.

After a glut of lending was ordered by the China’s central government in 2008 in response to the global financial crisis, the central government is now attempting to rein in lending as part of an effort to control inflation, which Hu Jintao labelled as the biggest problem facing China’s economy this year.

China has raised the reserve requirement ratio for banks every month this year, and upped the interest rate twice. The measures are having an effect: last week China’s seven-day repurchase rate, which measures funding availability between banks, rose to a three-year high.

That means that smaller, local banks are having a tougher time getting access to funds, and small and medium sized enterprises (SMEs) mainly rely on these smaller banks. The head of a loan department at one bank in Wenzhou told the Herald that only 10 percent of SMEs in Wenzhou now take loans from banks.  Many are turning to private lenders as a way to raise funds.

Wenzhou is renowned for the role that SMEs play in its lively private economy, but a similar situation is occurring in China’s manufacturing hub of Guangdong. The Herald reports that toy makers in the province are facing their worst financial situation since 2008. “Banks see the industry as too risky, and don’t lend to us,” one toy factory owner told the Herald.

SME closure is worrying for China’s government. SMEs account for 80% of manufacturing employment in China, according to Forbes. Riots in the town of Xintang in Guangdong province earlier this month were connected with unemployment amongst migrant workers in textile factories, which saw a decline in orders following the financial crisis. More factory closures could lead to similar incidents this year.

On Friday, the head of Guangdong provinces SME bureau stated that he was aware of the pressure on SMEs, stating that “profits are down, and some SMEs are making losses”. Whether measures will be taken by local governments to aid SMEs remains to be seen.