Toil and trouble

As the Spring Festival holiday approaches in January or February each year, many small Chinese factory owners treat their employees to banquets and raffles to reward workers for staying with the company for another year. But this winter, many bosses may be downsizing or canceling their celebrations as they register the effects of a prolonged economic chill.

Small and medium Chinese enterprises (SMEs) struggled last year. Since last April, the China Federation of Logistics and Purchasings small enterprise sub-index has remained below 50, indicating a slower rate of growth. Local governments have announced a variety of policies to support small businesses, including SME-specific funds, government purchasing, faster customer clearance, export-tax rebates and further cuts in administrative fees.

Yet its still unclear how much these policies have helped enterprises. China Economic Review talked to six people involved in small business in China to gauge how SMEs have fared and what their expectations are for the coming year.

Ms zhang Hong, whose family runs a private company in Shanghai that supplies steel products to elevator makers

Business was much worse in 2012 than 2011. We used to make gross profit of RMB2,000 (US$319.8) on every ton of steel sold, but now its less than RMB500(US$80) per ton. Also, customers now typically take three months to pay us, compared with one month before. The drop in the price of steel didnt affect us much, but companies with large inventories were hit hard. A lot of companies have gone bankrupt. The pressure we face is that the number of competitors has increased significantly, resulting in price cuts and lower profit margins. Our clients are also recording very low profit mar- gins, despite demand from governmentbacked affordable housing projects.

The situation will only worsen this year. We expect to see few or no profits, because the number of competitors continues to increase and clients have begun to ask suppliers to bid for contracts to further reduce costs, rather than placing orders with old suppliers directly. We are considering ending a long-time partnership with a major client to look for new investment opportunities and clients. This wont be easy.

I dont know what kind of supportive policies the government has introduced, but I dont expect them to be helpful. Steel companies cant get bank loans in general, and companies like us, investment companies by nature, have to use our homes as collateral. We used to raise capital among friends by paying higher interest rates when business was good, but now we have to rely on our own capital when we invest in new business prospects.

Mr Kong Qingtai, vice director of the China Association for Small & Medium Commercial Enterprises

Generally speaking, the situation was grim for SMEs last year and will be even grimmer this year. Small businesses face many problems, a major one being the difficulty of securing financing. Bank loans are not only hard to get, they have become unbearably expensive due to all sorts of other fees. Bank lending rates are only a little lower than rates offered by loan sharks, and the situation is pretty much the same with other financing channels. These capital shortages naturally cause businesses to contract. SMEs are either shutting down or cutting production, running half-days or less.

Well established SMEs that make high-tech products, or those with advantages in scale, technology or market share, have performed better. Banks are looking for these kinds of companies to issue their loans to. But recently launched high-tech startups are struggling. Export-oriented SMEs also saw their orders shrink significantly last year. I dont think the situation will improve in the first half of 2013. The orders they received for the period were down more than 30% year-on-year, by my estimates.

The government has introduced policies to support SMEs, but so far they are just documents. They exist on paper but not in practice. Implementing them will be a long process, and they wont be immediately effective or helpful.

Mr xiao Feng, vice general manager of Alibaba Group subsidiary Shenzhen OneTouch Enterprise Service, which provides customs clearance, shipping, insurance and financing services to small and medium exporters

Our business has expanded quickly in recent years as SMEs have tried to reduce costs with the economic slowdown. Small foreign trade companies had and will continue to have a difficult time. The reason exports are in distress is not demand or products. Company owners tell me that demand is still there, but they find profits too low to take orders. Companies in labor-intensive industries, such as apparel, are in the toughest situation, while those in machinery and furniture are doing better.

The obstacles they face are becoming more and more obvious. SMEs have powered Chinas growth in the past 30 years but had no financial leverage at all. Their costs have doubled yet they can get barely get loans. SMEs are left to their own devices. How can they grow? They are struggling on for a net profit of 1%, yet even that tiny return is disappearing.

Anthony Zhang, a Zheshang Securities employee who has helped some medical equipment producers list domestically

Medical equipment companies performed worse last year, due to both the slowing economy and government antigraft measures. Many people in the medical profession were arrested for taking kickbacks last year. Doctors and hospital executives are scared, so theyve stopped taking kickbacks for the moment and delayed purchases of medical equipment until this year and next year. So sales are more difficult.

Companies in the sector received a lot of development subsidies from the government, without which they might be running at losses. Government purchasing was also very helpful, and the government is approving research projects and grants and processing permits faster than for other sectors. Bank loans are also easy to get if companies can offer land or factories as collateral. Without collateral, getting loans is as difficult as for other sectors.

The macro environment last year was no better than in 2008, and SMEs in general performed poorly. Heavy taxes were a major problem. Few companies in the West can achieve a gross profit margin of 20%, but in China, half of our companies cant even survive with a margin of 40-50%. They need to have margins 70-80% so as not to suffer losses after taxes. Right now, business tax, value-added tax and income tax account for around 40% of a companys revenue on average, which encourages many private firms to dodge taxes.

Industry experts have been calling for tax cuts, but implementing that will be difficult. Cutting taxes would mean a decrease in government revenue and therefore a decrease in what they can do. Since the Chinese government wants to take charge of everything from what people eat to where they go to toilet, it will be difficult for big changes to happen. If significant tax cuts do come, that will help revive a lot of SMEs.

Ms Linda Wang, an officer in the corporate banking division of a foreign bank

The China Banking Regulatory Commission requires banks to keep the growth rate of loans for small and micro businesses on par with that for large enterprises. If banks work hard to approach those small companies, they can achieve this goal. Within the banking industry, we all know the implicit rule is that if your company is performing well, many banks will approach you to lend you money. So I dont think that limited funding is the main issue for SMEs. Many of these companies are rife with management problems.