China SMEs Under More Strain

Chinamigrant.jpgSource of picture: Rex Features

 

By John Richardson

WE are worried that the recovery in Asia’s chemicals and polymer markets may not be sustained.

One of our biggest concerns is that China’s small and medium-sized enterprises (SMEs), which make up 60% of the economy and are responsible for 80% of employment, are under more pressure.

They are being hurt by high borrowing costs and more expensive raw materials and fuel.

The SMEs can suffer on the way up, during commodity price rallies, and on the way down, when China is forced to tighten to reduce inflationary pressures. From April 2011, when liquidity was tightened during the last battle against inflation, the SMEs found it harder to access formal credit. This forced them into the expensive shadow-banking system.

As we discussed yesterday, China might soon face another cycle of monetary tightening as a result of rising manufacturing input costs.

If there is a sudden retreat in chemicals and polymer markets, China’s SMEs could be left sitting on high-cost raw material inventories if they have “bought ahead” of demand.

Evidence of the squeeze on the SMEs was provided by this article in the Global Times newspaper.

“The average profit margin of many of the country’s small businesses stands at around 1-3% in the current context; however, the figure was roughly 8-12% prior to the global financial crisis in 2008,’ according to Zhou, also director of the Wenzhou Council for the Promotion of Small and Medium-sized Enterprises,” said the article.

“‘Rising labour costs are unavoidably a trend in the country, and thus for SMEs the way ahead is either to resort to mechanisation or to steer toward high value-added businesses,’ Lu remarked, pointing to longer-term difficulties confronting the SME sector.”

One of the key tests for the sustainability of chemicals and polymer pricing post-Lunar New Year will be the strength of export orders from the West.

January’s export and import numbers looked very strong, even when the distorting effect of the Lunar New Year is stripped out (the Lunar New Year falls later this year and so there were more working days in January than was the case in 2012.).

But just over the horizon is the 1 March sequester in the US. It could well be that the Republicans and Democrats don’t reach a deal to avoid the sequester, leading to renewed recession.

And in Europe, political upheavals in Spain and pressure from a “one-size-fits-all” currency are just two of its problems.

The SMEs could, thus, find export orders weaker than expected after the Lunar New Year.

They might also struggle to get the staff to run their factories.

Labour shortages have been a feature of the post-Lunar New Year landscape for several years now.

We suspect that demographic factors, rising income levels in the countryside, and the high cost of living in the eastern and southern towns and cities, could once again combine to persuade many migrant workers to stay back home.

Those who do return could well also be more prepared to demand higher wages and down tools if their demands are not met.

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