10/04/2011, 00.00
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Global crisis sinking small- and medium-sized business

Tighter bank lending and need for liquidity are forcing many businesses to borrow with interest rates as high as 180 per cent. The problem is clearly visible in Zhejiang but is expected to spread to Inner Mongolia and Guangdong.
Beijing (AsiaNews/Agencies) – The failure of a number of small and medium-sized enterprises (SMEs) in Wenzhou could mark the start of a much larger wave of corporate bankruptcies across China. The warning comes from Chinese economists who note that the recent liquidity problems encountered by such enterprises came after the authorities reigned in bank lending.

In the past three years, China’s government adopted aid packages worth some US$ 4 trillion to save the Chinese economy. Now, however, Beijing has stopped banks from easing lending, concerned about rising inflation and fearful that many institutions might be overexposed.

Since January, 19 medium-sized companies went bankrupt in Wenzhou. Although they are but a small fraction of the 4,000 or so companies in the southeastern seaboard city known for its entrepreneurial spirit, the market is concerned that the failures might be the beginning of a credit crisis among SMEs.

According to a report by Barclays Capital, SMEs are desperate for capital, and increasingly borrowing money from non-bank sources at interest rates ranging from 20 per cent to 180 per cent because of credit tightening by banks.

May Yan, the analyst who wrote the report, said corporate failures in Wenzhou would inevitably be contagious and spread to other parts of the mainland.

Some analysts who spoke to the South China Morning Post also expect more victims in Inner Mongolia and Guangdong. In the former, a mining boom has led to an overheated property market and active underground lending. The latter is China’s most industrialised region with legions of SMEs.

For analysts, China could save SMES by easing credit. In fact, last week, the Wenzhou government imposed a cap on the interest rates charged on loans by non-bank lenders to try to rein in the rampant underground-loan market.

However, "As property and commodity prices are likely to drop due to the global economic slowdown, it could lead to a reduction in collateral values, and the possible bankruptcy of SMEs,” said a mainland lawyer, who asked not to be named.
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