Stabbing case highlights SMEs financing difficulties

By Li Xuanmin Source:Global Times Published: 2017/3/26 22:23:39

Public financing channels limited, highly leveraged private financing subjects to risks


Employees work at the China Minsheng Bank stand at the 2016 Small and Medium Enterprises Investment and Financing Expo in Beijing on July 21, 2016. Photo: IC

The case of a son that stabbed and killed one of this mother's creditors that she owed 170,000 yuan ($24,708) in April 2016 was back in the headlines over the weekend and has sparked a debate over China's rule of law.

The case has also shed light on a common fear among China's small and medium-sized enterprises (SMEs), as funds from public financial institutions are limited, forcing entrepreneurs to scramble for capital via highly leveraged private sources, experts told the Global Times on Sunday.

The 23-year-old man Yu Huan stabbed four debt-collectors, claiming they insulted his mother Su Yinxia, the chairman of brake block maker Yuanda Gongmao in Liaocheng, East China's Shandong Province, in April 2016, according to a Southern Weekly report over the weekend. One of the men died from severe blood loss.

Yu was sentenced to life in prison for intentional assault in February.

From July 2014 to September 2015, Su's company borrowed 1.35 million yuan with a 10 percent monthly interest rate from a local real estate company owned by Wu Xuezhan, who hired the debt collectors, the report said.

By April 2016, Su had repaid 1.84 million yuan of the loan and signed over a property valued at 700,000 yuan to Wu. But Su's company "was unable to pay the remaining 170,000 yuan, and that's why Wu came to the factory," according to the report.

However, the real estate company was not the only creditor of Yuanda Gongmao.

From 2014 to 2016, Su's company borrowed from other private lenders such as Chailease International Finance Corporation and Shandong Zhengdian Investment, but failed to pay back any of the loans, according to media reports. The firm took out more than 20 million yuan in loans, according to calculations by the Global Times.

Financing difficulties

It is obvious that Su's company was mired in a capital chain crunch since 2014, experts said. And borrowing was the only way to sustain its operations. 

But SMEs like Yuanda Gongmao increasingly face difficulties in securing loans from public financial arms, especially in a period during which China's real economy was struggling and SMEs posted slim profits, Feng Liguo, an expert at the China Enterprise Confederation, told the Global Times on Sunday.

"Commercial banks are not willing to issue loans to SMEs unless they are able to provide pledges of assets or are proven to be linked with an official background," Fen said, noting that China's financial industry, whose additional value represented 8.3 percent of China's GDP in 2016, still largely serves State-owned enterprises and large-scale companies.

The owner of a flag manufacturer in Shaoxing, East China's Zhejiang Province, who spoke on condition of anonymity, agreed. "Even if banks approve the loan, the interest rate it offers to SMEs are nearly twice the official rate, edging up to the same level as those of private financing… not to mention the releasing of loans still requires a lengthy process," the owner told the Global Times on Sunday.

Against this backdrop, private lending is more flexible and efficient for short-term capital demands, Li Huiyong, chief economist at Shenwan Hongyuan Securities, told the Global Times on Sunday.

But the risks associated with private financing are seen in Su's case.

The annual interest rates for private borrowing range from 12 percent to 20 percent, and average around 15 percent, the Economic Information Daily reported. "Such high costs create a heavy burden for SMEs, and when their return on the investment cannot catch up with the snowballing debts, they have no option but go bankrupt," Li said.

The flag factory owner also expressed his concerns. "My company has formed a guaranteed network with 10 SMEs in Zhejiang, where I can use other firms as collateral at banks in exchange for funds," he said. "But if one of the companies in the network collapses, my business would take a hit."

All things considered, the Chinese government should reform the country's finance system, experts said.

"It's not healthy. Private financing usually serves as a supplementary channel for companies, but now it is becoming a primary tool for SMEs," Fen said. He suggested that financial institutions cooperate and build a credit lending system, enabling SMEs to borrow based on credit.



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