Bloomberg News

China Offers Help to Small Companies Amid Wenzhou Risks

October 12, 2011

(Updates with analyst comments in fourth paragraph.)

Oct. 13 (Bloomberg) -- China announced a package of measures to help small companies, including tax breaks and easier access to bank loans, after the collapse of manufacturers in Wenzhou city highlighted growing risks to the economy.

The government will provide financial support and preferential tax policies for small companies, the State Council said in a statement yesterday, after a meeting at which Premier Wen Jiabao presided. The government will be more tolerant of bad loan ratios for small-company loans, the Cabinet said.

Small companies play an “irreplaceable” role in job creation, technical innovation and social stability, and the funding difficulties and tax burdens facing some of them “deserve high attention,” according to the statement. The support comes after Wen visited Wenzhou in Zhejiang province during a public holiday this month, urging greater support for small- and medium-sized companies.

“These measures are not likely to revamp the entire system for SME financing, but they are long-awaited measures in the right direction to help China’s small business cope with the current monetary tightening and rising uncertainties of external demand,” Lu Ting, a Hong Kong-based economist at Bank of America Corp. who is currently in Wenzhou, wrote in a research report today. “The private lending woes in Wenzhou could potentially worsen if the local government and Beijing do not take steps to intervene.”

Media “hype” surrounding reports of Wenzhou factory owners fleeing after failing to pay debts unnerved investors concerned about Chinese banks’ asset quality and a slowdown in the property market, UBS AG said in an Oct. 11 report. The city is known for a “vibrant private sector,” non-bank lending, and speculative investment in property, the brokerage said.

Informal Lending

Tighter credit policies have forced smaller manufacturers to seek loans through informal channels. Excessively high lending rates prompted Wenzhou to set an upper limit on the interest rates that private non-bank lenders can charge, in an effort to control risk in the banking industry.

China’s economic growth slowed to 9.2 percent in the third quarter from 9.5 percent in the second, while gains in consumer prices, exports and imports slowed in September, according to Bloomberg surveys ahead of data to be released this month.

The government will extend income-tax breaks for small businesses until the end of 2015 and encourage bank lending by lowering requirements on bad loans and risk weightings, yesterday’s statement said.

Low Ratios

China will maintain “relatively low” reserve ratios for small financial institutions, and the growth in lending to small companies should not be slower than banks’ overall credit expansion, according to the statement.

Regulators will be “appropriately” more tolerant of bad- loan ratios for small company loans, the statement said without being specific. The government also seeks to expand bond sales by small businesses and “strictly restrict” advisory fees banks charge them.

There hasn’t been waves of closures among small and medium- sized companies in China, although some face difficulties operating and obtaining funding partly because of rising raw material and labor costs and lending curbs aimed at fighting inflation, the People’s Bank of China said in its second-quarter report released in August.

China has raised interest rates three times this year and ordered lenders to set aside a bigger portion of their deposits to curb inflation, running near a three-year high.

Monetary tightening and smaller loan quotas have led to a 50 percent surge in informal lending this year as small businesses and developers turned to state-owned companies, private entrepreneurs and individuals for loans at interest rates of 6 percent to 8 percent, according to Credit Suisse.

China plans to implement new rules on bank liquidity on Jan. 1, 2012, to help lenders cope with potential shocks caused by funding difficulties, the nation’s banking regulator said yesterday.

--Dingmin Zhang, Stephanie Tong. Editors: Allen Wan, Joshua Fellman

To contact Bloomberg News staff for this story: Dingmin Zhang in Beijing at dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net


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