FocusChina banks grapple with failing SMEs

13 November 2008 05:13  [Source: ICIS news]

By Hong Chou Hui

 

SINGAPORE (ICIS news)--China’s banks - fearing loan defaults by clients - are pressuring small-to-medium sized enterprises (SME) to remain open despite mounting pressure from growing inventories, poor sales and thinning margins, said a local bank and industry sources on Thursday.

 

“It is common in China as the banks are unwilling to see their customers closing down and they can’t repay their loans if they closed,” said Cai Xin, an executive from the credit and loan department of Zhejiang-based China Construction Bank in Mandarin.

 

“As banks, we don’t expect to acquire their fixed assets such as buildings and plants in place of their loan repayment if they shut down. We need money instead of their assets,” added Cai.

 

Many smaller enterprises are said to be on the verge of bankruptcy due to sluggish export demand coupled with a sharp devaluation of their stock on hand, causing great concern to local banks.

 

“Small-to-medium petrochemical players make up close to two thirds of China’s petrochemicals sector so it doesn’t come as a surprise that the banks are coming down harder on those who owe them money,” said a monoethylene glycol (MEG) trader in northeast Asia.

 

Chinese banks have become more vigilant in lending to SMEs with a registered capital amount of less than yuan (CNY) 300,000 ($43,923), said a source from the Agriculture Bank of China.

 

“Lending money to companies is no longer seen as a safe option in these volatile times. The banks won’t let anyone shut down their plants without scrutinising their accounts closely because they’re worried that this could result in a default situation,” said an eastern China-based maker of polyester fibre and yarns (POY) in Mandarin.

 

Petrochemical trade defaults have been increasingly common, leaving some banks holding product as collateral when a deal fails.

 

As SMEs are pressured by banks to stay open in the hopes of keeping cash flow, many factories are unable to relieve their pressure from high stocks, which were keeping prices low.

 

“This has effectively led to growing inventories and along with poor consumer demand, this has further reduced margins to bare bones and POY makers in the Shaoxing region are effectively on life support these days,” added the same POY maker in Mandarin.

 

Despite a series of policies recently unveiled by Beijing to aid China’s small-to-medium enterprises, local banks still tightened the cash flow to such companies to avoid defaults in view of the economic downturn which began in the second half of 2008, said an industry source in Shanghai.

 

Coupled with the closure of more than 67,000 small to mid-sized Chinese firms in the first half of the year, the confidence of lenders in such companies to repay their financial obligations has been rocked further.

 

However, some observers believe a period of consolidation is inevitable in China given the widespread failure of some smaller sized enterprises downstream.

 

“The banks will support the larger and stronger businesses, while smaller ones they will let fall. Only the strong will survive,” said a Shanghai-based petrochemicals trader.

 

($1 = CNY6.83)

 

Steve Tan, Judith Wang and Dolly Wu contributed to this article.

 

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By: Hong Chou Hui
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