China: Small Business Bailout Raises Questions

Is the long tipped hard landing for China's economy about to happen?

Questions are being asked if China's economic slowdown is starting to crunch sections of the economy, just as the trade surplus weakens as export growth fades.

At the start of this week, big banks were supported. On Thursday it was small business which was extended a rather generous helping hand as the government tried to put a lid on a growing financial problem spreading through small businesses from the city of Wenzhou in Zhejiang province.

A story posted on the official website Xinhua yesterday revealed that the government has ordered the country's banks to support financially strapped small and micro businesses.

It also came hours before the September trade figures were released, which showed a surprising slowing in exports and a smaller-than- expected surplus (see story below).

It is has been a dramatic change of approach from the government.

On Monday, Central Huijin Investments, the domestic arm of the country's sovereign wealth fund, announced that it had bought shares in the country's four biggest banks, a move that sparked a rally in bank shares and stopped a downturn in share prices in Hong Kong and Shanghai.

It was the first such announcement for three years (the last time was in the GFC and was made to steady the market then as well).

Now a well publicised move to help struggling small businesses has happened.

Clearly the credit crunch engineered by multiple increases in asset reserve ratios and six interest rates is hurting.

In some respects the move is a something of a bailout for small and micro businesses in China, according to the story on Xinhua.

The move came only days after a report said there wasn't an economy-wide problem with small businesses.

However, it seems the country's main day-to-day administrative group, the State Council, thinks otherwise.

So on Wednesday night it issued a statement revealing what was called "a new approach toward helping the country's cash-strapped small and micro-sized enterprises, pledging stronger financial and fiscal support to allow them to plow through current economic difficulties".

The statement holds out the chance of the current high level of asset reserve ratios (21.5 per cent for big banks) might be eased for those lenders financing small business.

As well the State Council urged banks to increase credit support for small businesses, "while lending to small firms whose credit lines are below 5 million yuan (786,000 U.S. dollars) should grow at a rate no lower than the average loan growth of the country's banks."

"Small financial institutions that meet the loan growth target for small businesses may be subjected to lower required reserve requirements than the 21 per cent currently required for major banks," the statement said.

"Commercial banks are prohibited from charging fund management fees, financial consulting fees and other unreasonable fees for their services to small firms."

The State Council also offered more financing channels for small businesses to help them raise funds, promising a greater issuance of collective banknotes, bonds and "short-term papers that involve two to 10 small firms".

According to figures from the country's banking regulators, loans to small firms grew 26.6 per cent over the year to the end of July, much faster than the growth in all loans by Chinese banks.

Xinhua quoted Wen Jiabao who said banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit.

To support small businesses, the State Council has also "formulated fiscal policies, such as raising the tax threshold for small firms paying corporate value-added taxes and business taxes, forgiving banks' stamp tax on lending contracts with small firms for three years and boosting the scale of special funds designed for small- and mid-sized enterprises."

The story also points out that the State Council meeting was chaired by Premier Wen Jiabao who a week ago visited the city of Wenzhou in Zhejiang province where at least 80 businessmen have reportedly committed suicide or gone into hiding because of debts run up in a private borrowing chain that has seen losses estimated at $US1.6 billion.

Xinhua reported last weekend that 20 per cent of Wenzhou's 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city's council for small and mid-sized enterprises.

However, in a report issued on Monday Xinhua said:

"News of the incidents has even made waves in the central government. During a visit to Wenzhou on Oct. 5, Premier Wen Jiabao urged financial support for cash-strapped small businesses. However, a multi-department investigation has shown that the crisis has largely been kept under control.

"However, the People's Bank of China, or the country's central bank, the Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics (NBS) came to a different conclusion based on recent investigations conducted in southeast China's Guangdong Province and the eastern provinces of Zhejiang and Jiangsu, the country's most developed regions.

"A massive collapse of small businesses does not exist, even though some SMEs have been confronted with cash shortages. The number of SMEs keeps increasing, as broken-down enterprises are fewer in number than newly founded ones," said Wang Wenbo, an NBS official, at a conference held by the Chinese Academy of Social Sciences on Monday."

Three days later and it is now a national problem, according to the Premier and State Council, as Xinhua reported:

"Small firms play an irreplaceable role in fostering economic growth, increasing employment, facilitating scientific and technological innovation and maintaining social stability, according to an official statement released after a State Council executive meeting chaired by Premier Wen Jiabao.

"The State Council admitted that some small- and micro-sized enterprises have encountered difficulties due to heavy tax burdens and difficulty in accessing financing.

"We must pay close attention to such problems," the State Council said in the statement.

"Financial and fiscal support will go to the nation's real economy, particularly to small firms in sectors that meet the nation's industrial and environmental protection requirements and can create more jobs for the country, according to the statement."

State Council said governments must take effective measures to reduce informal lending, as well as crack down on illegal fund-raising and financial pyramid schemes.

China's trade surplus fell to $US14.51 billion ($A14.32 billion) in September, smaller than forecast, thanks to a sharp slowing in exports in the month.

Imports also slowed noticeably in another suggestion that the economy is slowing.

However, some of that fall could also be linked to the sharp fall in commodity prices (oil, copper, etc) during September.

Iron ore and copper imports rose in the month, while oil, coal and soybean imports fell.

Exports rose 17.1 per cent to nearly $US170 billion in September (a new all time high) from September 2010, down from the 24.5 per cent annual rate seen in August.

Imports expanded by 20.9 per cent to $US155.2 billion in September from a year earlier, compared with an increase of 30.2 per cent pace on August.

The trade surplus was down from August's $17.8 billion and well below July's 30-month high of $31.5 billion.

It was the lowest in four months.

From January to September, trade surplus shrank 10.6 per cent to $US107.1 billion compared to first nine months of 2010.

Economists had forecast a $US17.25 billion trade surplus, according to a Dow Jones survey, or around $US16.3 billion in a Reuters survey.

In month-on-month terms, exports fell in September after calendar adjustment by just over 2 per cent, versus a 3.3 per cent drop in August and the sharp 5.4 per cent rise in July.

China's trade surplus with the European Union was $US12.9 billion in September, down from $US19.4 billion in August.

China's export growth to the 27-member Eurpean Union bloc grew 9.8 per cent in September in month-on-month terms, down sharply from the 22.3 per cent growth recorded in both August and July.

China's overall balance of trade with the U.S., however, remained unchanged in September from August; in both months China recorded a $US10.1 billion surplus.

According to preliminary data, China imported 60.57 million tonnes of iron ore in September, up 2.5 per cent from August the highest monthly figure since January.

China's September crude oil imports fell 12.2 per cent on a daily basis from a record high rate a year earlier and were under the 5.0 million barrels a day level for the fourth consecutive month.

Customs data showed on Thursday that China brought in an average 4.98 million barrels per day (bpd) of crude oil in September, slightly higher than 4.95 million bpd in August.

China's copper imports stood out in the data, hitting a 16-month high in September as buyers seemingly took advantage of the slump in the price of metal last month.

Inbound shipments of the refined metal, copper alloy and products rose 12 per cent to 380,526 tonnes in September, from 340,398 tonnes in August.

It was the 4th monthly rise in a row and September's was the highest level since May 2010, and 3.3 per cent higher than September 2010.

China's inflation data for September is due for release later today.