According to “Survey on Current Conditions of and Intentions for Outbound Investment by Chinese Enterprises (2008-2010)” officially released by the China Council for the Promotion of International Trade (CCPIT), over 60% of respondent enterprises believe the “determining factor” or “crucial factor” restricting their outbound investment is financing difficulty and shortage of international trade management talents. Most of these enterprises are small and medium sized enterprises(SMEs) with no more than 5 million outbound investment.
The recent “cold current sweeping across manufacturing industry” in Pearl River Delta was stirred up by sharp decrease of international orders especially that of European and American orders. However, the root cause lies in disrupted capital chain. At the onset of global financial meltdown in 2008, manufacturing industry in Pearl River Delta faced similar decline of international orders but anyhow remained buoyant. At that time, the Chinese government made a swift switch from the previous“tight” monetary policy to “moderately easy” one, so delivering benefit to SMEs and ensuring their survival. But currently, the shortfall of capital support from financial institutions to real economy presents a big problem for quite a few small and medium sized foreign trade enterprises. Usually it means risk free to grant loans to large state-ow ned enter prises especially for government projec ts, since it has government finance as a guaranteed or back-up and the depositloan interest gap will be the ensured profit. By comparison, it is highly risky to grant loans to SMEs and the loan interest is fixed. Therefore, as far as banks are concerned, issuing loans SMEs means much less profit than granting loans to government projects and large state-owned enterprises.
As a result of lack of loans, companies have to hand over their international trade orders to others. In addition, companies don’t know when they could secure loans from banks. So when orders come and if loans haven’t been issued in time, they have no money to buy raw materials. Mortgage guaranty is an important instrument for banks to protect their own interests when lending loans to small and medium sized export enterprises who, however, generally don’t own assets such as land or house property that could be used to support mortgage guaranty. Furthermore, default cases among foreign clients increased dramatically since the financial crisis. Accordingly, export business and foreign letter of credit gain less and less credit among banks, which erects hurdles for those export-oriented enterprises that rely on letter of credit financing. All these dragged down the lending efficiency for SMEs.
Zhu Hongren, news spokesman of Ministry of Industry and Information Technology, briefed that with a view to consolidating achievements in fighting the international financial crisis, Chinese government has been implementing a prudent monetary policy since last year and has raised deposit reserve rate for a dozen times in a row and interest rates for twice straight this year.“Credit loan shrinking makes it harder for SMEs especially small- and microenterprises to finance.”
Statistics show that at present loans issued by Bank of China basically cover all the large enterprises and 80% of medium sized enterprises. In contrast, 80% of small sized enterprises have no access to credit loans. A great number of SMEs are forced to resort to non-governmental loans under emergency conditions and the interest rates have rocketed to from 50% to 100%. This is the key reason that financing cost remains so high. SMEs have been undergoing a hard time in securing loans since credit crunch. Only 10% of 340,000 SMEs in Shanghai have access to loan services offered by banks. The number of SMEs seeking private loans is considerable, pushing up the interest rates to 50%-100% and so financing cost. Underground banks are extremely active in Yangtze River Delta and particularly W e n z h o u could be cited as an example. Financing dif-

ficulty put many SMEs in a quandary. Banks, by displaying a wide range of excuses, turn their back on SMEs when they are in need of financial support. They have no choice but to seek desperate help from underground banks even though the interest rates are unreasonably high. There are both inflationary and deflationary factors in Chinese economy. Relevant experts are convinced that “financing difficulty” besetting SMEs results, in a large part, from the impotence of the current financial system in solving the “bottleneck”problems of small business financing such as limited financing channels, small-scale financing and excessive financing cost.
“For the moment, the investment and financing system in China has yet to develop fast enough to match the economic growth,” said Zhou Dewen, the head of the Wenzhou Small and Medium Enterprise Business Development and Promotion Association, “On one hand, Wenzhou has 360,000 small and medium enterprises that crying for capital and financial support. On the other hand, Wenzhou has massive private capital at hand. Unfortunately, what is missing here is a linking bridge.”He suggested relevant departments expand the trial rural bank scheme nationwide and relax restrictions on market access, scale of financial institutions and floating range of interest rates so as to channel private financial capital into normal financial market. In final analysis, the only way out is to allow market forces to work against the high risk of private SMEs and so to sustain the average rate of profit and overcome the “financing difficulty” of SMEs.
The other day, aiming to break the yoke of “financing difficulty” that weigh down SMEs, nationwide efforts has been made to strengthen financial support to them since this year and a series of measures and policies have been taken to effectively boost the development of SMEs with special focus on technological innovation, restructuring, energy conservation and emission reduction, market development and job creation.
Just a few days ago, Shanghai municipal government allocated “three packages of one-billion RMB” special fiscal funds which will share credit risk and boost financing for SMEs in combination with measures taken by the Shanghai Bureau of China Banking Regulatory Commission about commercial banks supporting SMEs credit financing. Additionally, in order to give full play to special fiscal funds in prying and guiding market, the Shanghai municipal government passed a host of forceful supporting measures: municipal financial departments will set up special funds in the government transfer payment to provincial financial departments so as to encourage provincial governments to increase their support for SMEs financing; financial support to those small-sum loan businesses —so called “grass-root finance” should be highlighted; State owned companies, private companies and other various ownership companies especially large group companies are all encouraged to set up small-sum loan businesses so as to bring the number of small-sum loan businesses operating in Shanghai from 60 to 100 and augment the annual amount of loan to around 35 billion RMB. We hope the three billion financial funds will, just as the director of the Shanghai Municipal Finance Bureau put it, “place 30 billion RMB at the service of SMEs with 10 times leverage.” The campaign initiated by Shanghai municipal government to assist SMEs financing will surely bring down the financing cost of a significant number of SMEs. Particularly with the government sharing in the risk of loss, it is sure that financial institutions will be somewhat emboldened to grant loans to SMEs. What’s more, under this campaign, there will be more small firms offering loan guarantee.
Shandong provincial government constantly improves the mechanism supporting and guiding companies to get listed and pressing ahead high quality SMEs to get listed and so enjoy direct financing. The special fund used to assist companies in getting listed will be ramped up, the incubation mechanism for SMEs getting listed be continuously improved and the direct financing of listed SMEs be accelerated. Meanwhile, the guidance mechanism for venture capital investment should be promoted with the object of channeling more social capital into SMEs. The government also directs and supports the effort to set up venture capital companies by using social capital both inside and outside the province by way of state equity participation, follow-up investment and financing guarantee. Venture capital companies are encouraged to give priority to sci-tech SMEs and high and new technology SMEs that are still in their seed or expansion stage.
Financial and taxation departments in Tianjin adopt a series of prompt measures and continue to improve these measures to help SMEs to pull through the difficult time by dint of financial and taxation approaches. At present, the municipal government has pooled 630-million-yuan development fund for SMEs and implemented numerous preferential taxation policies
that will buttress up growing SMEs. The government also put in place a special fund worth 30 million RMB for SMEs getting listed. The fund is used to pay the cost for getting listed for those hard-up companies who are allowed to pay the money back later. The fund is also used to reward those companies who successfully got listed and accessed to public financing. SMEs credit guarantee agencies are exempt from business tax for its first three year profit and the corporate income taxes collected by the local government will be refunded in three years following its profit-making year. Furthermore, those SMEs credit guarantee agencies with outstanding performance will receive encouragement grants from the government.
Provincial venture capital investment has been set up in Fujian province. For the first stage, 600 million RMB is injected into the provincial venture capital in order to speed up industrial rejuvenation and development, gradually foster a number of promising SMEs and gear up the industrialization of “6.18” project. In addition, the government promulgated “Interim Provisions on Fujian Provincial Venture Capital Investment Management”to improve capital management and increase capital efficiency.
Besides, the municipal government of Zhangjiagang, Jiangsu Province intensifies the effort to innovate SMEs financing methods, facilitates and guides SMEs in their direct financing through collective notes, private equity and so on, and installs SMEs financing service mechanism with various participants. In the first half of the year, the government of Xuhui District, Shanghai, pools a total of 769 million RMB for companies within the district by making full use of policy financing.