Pumping $332bn in funding back into the Chinese economy has done little to achieve its stated purpose of relieving the burdens of the country’s small, private companies. Interviews by FT Confidential Research with business owners and bankers in Shenzhen highlighted a fundamental contradiction in the leadership’s policy priorities that no amount of extra funding will fix.
Bankers said they were generally unwilling to take the risks associated with lending to small companies because they typically lacked credit histories and acceptable collateral, and carried high rates of failure.
Despite the government’s repeated entreaties this year for banks to increase support for such businesses, loan officers said the commercial case for doing so, never particularly strong, had been weakened by a general downturn in economic conditions that is driving up their bad loan ratios.
“Lending to small businesses may be politically correct but it’s economically unviable,” said a loan officer with a medium-sized bank in Shenzhen. He has been packaging loans to big state companies to make them look like loans to small businesses in order to meet top-down quotas, he admitted.
The travails of small companies contrast with the real estate sector, which still offers attractive business for loan officers — policy permitting — thanks to its relatively predictable returns and solid collateral.
Among the 38 small, private companies surveyed by FT Confidential Research, just 17 said they were benefiting from the shift in government policy. Fewer than half of the companies, which employ 332 people on average and made sales of Rmb86.2m ($12.36m) last year, said they were able to get bank loans over the past 12 months, while just eight received the full amount of loans applied for.
Companies affected include Yunshitong, a profitable mattress maker, whose credit line with a local bank was recently cut without warning. Even then, owner Chen Guanyu has had to personally deposit Rmb3m for at least a year to access his funding.
“The banks see us as second-class clients — there is no way they will listen to the government and give us a break,” he said.
Our survey results stand in contrast to the considerable actions taken by the central government in the name of supporting underserved parts of the economy, including small companies. A cut in the reserve requirement ratio on October 15 was the fourth such move this year, bringing the total amount of bank deposits allowed back into the system to Rmb2.3tn. Concerns among business owners are not being helped by mixed messages from the leadership about
This year’s cuts have been unusual in that they have required recipients of the extra funding to show willingness to lend to sectors such as small businesses and borrowers in rural areas, which have typically been at the back of the queue for bank loans. Even as officials have encouraged lending, the shadow finance sector, which was a key funding source for such companies, has been in retreat as a result of the government’s de-risking campaign.
The Communist party’s politburo on Wednesday acknowledged that the economy is slowing and pledged new countermeasures. The reserve ratio may be lowered again before year-end, while official rhetoric at least suggests greater empathy for small companies and their struggles. Responding immediately to the third quarter’s slower-than-expected growth numbers, vice-premier Liu He said those who are covering their backs by failing to support to private companies “have big problems with their political orientation and must be firmly corrected”.
Fighting to stay afloat
The economic slowdown is striking the heart of industry in Guangdong province, with 22 of the 38 firms surveyed saying sales were stagnant or down on a year ago. Where capacity expansion was once the main driver of loan demand, 22 of the respondents said they were borrowing to service outstanding loans. All the companies we surveyed are private; the government estimates that private company interest expenses rose 11.8 per cent in the first nine months of this year.
Dashan Logistics is struggling to service its debts, even though business is good. Dashan’s operating income rose 20 per cent last year to Rmb8.4m but interest payments were Rmb10m. That gap may widen this year, said owner Zhang Detian. Among respondents to our survey, 18 reported an increase in total debt over the same period last year.
Debt pressures are being exacerbated by the lengthening time it is taking for businesses to be paid. Private companies spent an average of 38.1 days collecting receivables in September, up from 26.4 days a year ago. Having less cash in hand is making companies even more reliant on credit to keep operations afloat.
Li Xiangwei, owner of Yingrong Textile in Shenzhen, said his company’s outstanding short-term borrowings doubled this year from 2017 as payments became harder to collect.
“This constant shortage of capital is forcing us to keep borrowing, regardless of the state of the business,” he said.
Of the 17 companies that had managed to borrow from banks, 10 said interest payments were up on the same time last year. This is making it more difficult to roll maturing debt over into new loans. Shenzhen-based Hongwei Shoe took out an Rmb8m loan at 7.8 per cent this year to pay off 7 per cent loans. Owner Luo Zhenwei said he planned to sell one of his apartments in downtown Shenzhen to make up the shortfall.
The size of loans is shrinking while the time taken for approvals to come through has risen. Twelve of the 17 bank borrowers said loan approvals took longer this year than last because lenders were taking more time on due diligence. Wanrun Technology has hired external accountants to go through its books because of tighter lending requirements by the bank. “You have to be very well behaved to be eligible for bank loans,” said Mr Du.
For some small companies — particularly getihu, or mom and pop shops — access to credit has improved. In Shenzhen, outstanding loans to businesses with fewer than 100 employees have risen nearly 30 per cent so far this year.
The Shenzhen government has earmarked more than Rmb2bn to subsidise interest rates on small business loans and pledged to recompense banks when loans go bad. But only a handful of companies have the profitability and necessary paperwork to apply for official assistance.
Shenzhen says the number of businesses that are borrowing has risen to nearly 62,000 from 20,451 three years ago. Although this is an impressive jump, it is just a fraction of the 1.1m small businesses registered in the city.
— Sun Yu, Head of Network Research, FT Confidential Research
FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.