Is the long tipped hard landing for China’s economy about to happen?
Questions are being asked if China’s economic slowdown is starting to crunch sections of the economy, just as the trade surplus weakens as export growth fades.
At the start of this week, big banks were supported,yesterday it was small business which was extended a rather generous helping hand as the government tried to put a lid on a growing financial problem spreading through small businesses from the city of Wenzhou in Zhejiang province.
A story posted on the official website Xinhua yesterday revealed that the government has ordered the country’s banks to support financially strapped small and micro businesses.
It also came hours before the September trade figures were released, which showed a surprising slowing in exports and a smaller than expected surplus (see story below).
It is has been a dramatic change of approach from the government.
On Monday Central Huijin Investments, the domestic arm of the country’s sovereign wealth fund, announced that it had bought shares in the country’s four biggest banks, a move that sparked a rally in bank shares and stopped a downturn in share prices in Hong Kong and Shanghai.
It was the first such announcement for three years (the last time was in the GFC and was made to steady the market then as well).
Now a well publicised move to help struggling small businesses has happened.
Clearly the credit crunch engineered by multiple increases in asset reserve ratios and six interest rates is hurting.
In some respects the move is a something of a bailout for small and micro businesses in China, according to the story on Xinhua.
The move came only days after a report said there wasn’t an economy wide problem with small businesses.
But it seems the country’s main day-to-day administrative group, the State Council, thinks otherwise.
So on Wednesday night it issued a statement revealing what was called "a new approach toward helping the country’s cash-strapped small and micro-sized enterprises, pledging stronger financial and fiscal support to allow them to plow through current economic difficulties".
The statement holds out the chance of the current high level of asset reserve ratios (21.5% for big banks) might be eased for those lenders financing small business.
As well the State Council urged banks to increase credit support for small businesses, "while lending to small firms whose credit lines are below 5 million yuan (786,000 U.S. dollars) should grow at a rate no lower than the average loan growth of the country’s banks".
"Small financial institutions that meet the loan growth target for small businesses may be subjected to lower required reserve requirements than the 21 percent currently required for major banks," the statement said.
"Commercial banks are prohibited from charging fund management fees, financial consulting fees and other unreasonable fees for their services to small firms."
The State Council also offered more financing channels for small businesses to help them raise funds, promising a greater issuance of collective banknotes, bonds and "short-term papers that involve two to 10 small firms".
According to figures from the country’s banking regulators, loans to small firms grew 26.6% over the year to the end of July, much faster than the growth in all loans by Chinese banks.
Xinhua said Wen Jiabao said banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit.
To support small businesses, the State Council has also "formulated fiscal policies, such as raising the tax threshold for small firms paying corporate value-added taxes and business taxes, forgiving banks’ stamp tax on lending contracts with small firms for three years and boosting the scale of special funds designed for small- and mid-sized enterprises."
The story also points out that the State Council meeting was chaired by premier Wen JiaBao who a week ago visited the city of Wenzhou in Zhejiang province where at least 80 businessmen have reportedly committed suicide or gone into hiding because of debts run up in a private borrowing chain that has seen losses estimated at $US1.6 billion.
Xinhua reported last weekend that 20% of Wenzhou’s 360,000 small and mid-sized businesses have stopped operating due to cash shortages, according to the city’s council for small and mid-sized enterprises.
But in a report issued on Monday Xinhua said:
"News of the incidents has even made waves in the central government. During a visit to Wenzhou on Oct. 5, Premier Wen Jiabao urged financial support for cash-strapped small businesses. However, a multi-department investigation has shown that the crisis has largely been kept under control.
"However, the People’s Bank of China, or the country’s central bank, the Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics (NBS) came to a different conclusion based on recent investigations conducted in southeast China’s Guangdong Province and the eastern provinces of Zhejiang and Jiangsu, the country’s most developed regions.
"A massive collapse of small businesses does not exist, even though some SMEs have been confronted with cash shorta
