Credit crunch, high prices hit SMEs

The city of Wenzhou, a prosperous manufacturing port in China's eastern Zhejiang Province, was once famous for its shrewd entrepreneurs and bullish private capital scene. But recent credit tightening and rising costs of raw materials has pushed many small businesses in the city to the verge of bankruptcy.

This factory once was used by "Sooq", a famous electric cable company in China.

But rapidly evaporating capital and more than 120 million yuan in debt has pushed the company into bankruptcy.

Unlike Sooq, many factories in the city are seemingly operating as usual. But as a matter of fact, they are scrambling with shrinking profit margin and capital shortages.

Pan Jianzhong, General Manager of Juyi Corp., Zhejiang province said "The monthly interest rate offered by the four state-owned banks is more than 8 to 10 percent. And interest rates in private banks are much higher. So more than 5 percent of our profit is eaten up by interest payments. That's doubled, and that's why our profit margin is shrinking."

In the meantime, rising manufacturing and labor costs are also squeezing profit margins.

Wenzhou entrepreneur said "The cost of leather has doubled in recent years. And with rising of wages and the Renminbi's appreciation, our profit margin is becoming narrower."

Wenzhou is not the only city that's finding its manufacturing base withering. Many businesses in the Yangtze River Delta region are also facing the same fate.

A shortage of capital has brought opportunities for some businesses, though: in particular, the private banking sector. Industry insiders say more than a third of the capital in Wenzhou are invested in the financial investment sector. But experts say a resurgence of the loan sharks, who charge exorbitantly high interest rates, is bad news for local businesses.

Chen Lejing, Executive Assistant Dean of China Venture Capital Research Inst. said "Private lenders resort to many illegal measures to get back their money. For small and medium sized businesses, high interest rate loans are poison."

Industry insiders say effective policies are needed to ensure a better financing environment for small and medium sized businesses. And they warn that doesn't happen soon, more and more small businesses will veer into bankruptcy.

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