October 2009 Archives

China SME.jpg Gauging the current outlook for China's small and medium-sized enterprises (SMEs) is not easy. Depending on the way you a look at them, China's SMEs can be an unwieldy mass hard to regulate and prone to quality and intellectual property (IP) violations (as this blog has reported before), or a rising class of innovative entrepreneurs who traditionally struggle on their own, unable to obtain financing from China's banks.

For obvious reasons related to their vast numbers, varying sizes, locations, industries and types of business, they are not an easy bunch to pin down. Yet if you heard anything about SMEs in China in the last year, it is likely to be something related to how disproportionately they have been affected by the financial crisis, intermingled with sordid tales of falling exports and job losses. At the same time, the traditional story on SMEs is that they are not favoured lending targets for banks, and China is no exception to this.

China's large state-owned enterprises (SOEs) are now regular headline features with ever-larger investments and acquisitions the world over, yet SMEs are the backbone of China's economy. They are said to account for about half of tax revenues, 68% of exports and around 60% of GDP. According to statistics quoted here in June 2008, 99% of China's SMEs offered 75% of new jobs and created 50% of the country's wealth, although they have little more than a 10% share of the capital. Nevertheless, they are also said to be responsible for 65% of China's invention patents, yet China's State Intellectual Property Office is well aware of problems regarding a lack of awareness of IP protection, as 80% of SMEs in China supposedly have no IP department at all.

SMEs' struggle to obtain financing and the attendant economic hardship in China is well documented, and well predate the financial crisis. According to China Daily, in 2007 in Guangdong province, for instance, only 2% (amounting to USD 286 billion) of loans extended in the province were given to SMEs, while in the first half of 2008 it was reported that 67,000 SMEs in China went bankrupt while over 20 million factory workers could have lost their jobs. Electricity use by SMEs fell by almost 50% year-on-year during the first half of 2008, according to China's National Bureau of Statistics.    

Furthermore, China's small players are said to have been given short shrift in the government stimulus spending, as this has benefited mostly big state-owned firms. The Wall Street Journal's China Realtime Report this week reported on figures provided by China's central bank and banking regulator to illustrate how China's small businesses are currently doing at getting loans. SMEs, they said, accounted for 14.1 trillion yuan of outstanding bank loans at the end of September, up 28% year-on-year, whereas overall bank lending was up 34.2% in September. According to the Wall Street Journal's calculations, this meant that SME loans accounted for 36% of total lending, although it could actually be less than that. Yet by the end of the first half of this year, China's Banking Regulatory Commission reported that Chinese banks' outstanding loans to SMEs stood at 12.52 trillion yuan, accounting for 53.7% of the total outstanding loans to all enterprises. According to the Wall Street Journal, thus, the latest figures would seem to show that the explosion in bank credit has indeed been weighted toward large, state-owned companies, and that small firms' share has been shrinking.

Yet an official from China's Banking Regulatory Commission announced in September that China's five state-owned commercial banks and twelve joint-stock commercial banks have by the end of the first half of 2009 all established specialised institutions for providing financial services to SMEs, and plans are afoot to set up 1294 new rural financing institutions within three years. The official also stated, however, that even though SMEs in China currently enjoy the same finance and tax policies as larger enterprises, the non-performing loans ratio on SME portfolios is 4.5% as opposed to only 1% for large-scale enterprises. He called on the government to reduce the business tax rate for loans to SMEs.

A directive issued by the State Council on September 22 seems to have been aimed at this, and committed the government to loosening rules for bank loans to SMEs in order to tackle difficulties in raising funds. The directive promised tax breaks for small firms with an annual taxable income below 30,000 yuan for the year 2010. In August, after a meeting of the State Council chaired by Premier Wen Jiabao, it was decided that restrictions on SMEs entering certain industries will be loosened and detailed measures for government procurement from SMEs will be put forward. In addition, the creation of a Growth Enterprise board would be speeded up to increase financing options for SMEs, and subsidies will be offered to financial institutions that lend to new businesses. In October, Li Yizhong, head of the Ministry of Industry and Information Technology, disclosed to the media that China will continue to launch many favorable tax policies to support technology SMEs, like reducing by half the income tax payable of small enterprises, lower land use tax for SMEs, and the postponement of tax payments of SMEs who face certain difficulties. The National Development and Reform Commission has even encouraged China's SMEs to pursue foreign investment opportunities and to set up trading entities and overseas research institutions. It also affirmed the government's support on the development of small private venture capital firms via tax breaks.

So what ultimately can we take from all this? By their very nature, many SMEs all over the world will always struggle. Yet China's government seems aware of how important the well-being of China's SMEs is, and has acted accordingly. Indeed, it is possible to bicker about numbers and their veracity, but if the bank lending figures quoted above tell us anything, it is that China's SMEs have not been shut out altogether in favour of the SOEs (as some have feared), and perhaps their supposedly perennial struggle for financing is somewhat exaggerated. Yet if the high-level picture seems to be changing, it probably will not mean much to the myriad small businesses and workers that toil daily throughout the length and breadth of China to make a living, on their own accord. They may have a long way to go on intellectual property and quality issues, but with their problem-solving, adaptable way of doing business, they may in future be part of the solution rather than the problem.

Appendix: Additional recent SME-specific announcements:
  • 2008-09: The B2B online giant Alibaba.com has launched a kind of matchmaking service for its members and banks. The service was launched last year in Zhejiang province, where Alibaba says 600 businesses used it to acquire loans worth more than USD 146 million. The programme has subsequently been expanded to Guangdong, Shandong and Jiangsu provinces and several coastal cities, and ultimately Alibaba expects to facilitate more than USD 878 million in loans. Because Alibaba can provide detailed information on its members, the key shortcoming that Alibaba is attempting to overcome in this way is the lack of a well-established credit rating system in China. 
  • June 09: A central government fund plans to extend grants of 1.7 billion yuan to technology-based SMEs. Grants from an Innovation Fund will go to 2,725 projects from the IT, pharmaceutical, new material, new energy and environment protection sectors
  • September 09: The China Association of Small and Medium-Sized Enterprises announced it was scheduling a series of 'speed dating' sessions in 14 cities to introduce SMEs to new financing sources. At a pilot event in Shiyan in Hubei province in May, contracts of nearly 1.8 billion yuan were signed 
  • September 09: An article from CCTV reported that a bond insurance company dedicated to helping small firms issue corporate bonds was set up. Established by the National Association of Financial Market Institutional Investors and six large state firms including PetroChina, the new company aims to raise the credit level of SMEs through warrantees and by issuing financial derivatives
  • October 09: China's long-awaited Nasdaq-style Growth Enterprise Market board is launched (see also this report). Hailed as an important step for stimulating enthusiasm for entrepreneurship and boosting private investment, the board will cater largely to technology and innovation-oriented startups that typically find it harder to obtain bank loans. The first 28 companies to list on the board, ranging from software to medical equipment makers, are said to have raised 16 billion yuan in their initial public offerings
Image: http://news.southcn.com
The following article analyses perceived changes in the attitude of Russians to Chinese companies in terms of trade and investment.

2009年9月30日,在中国举行六十大庆的前一天,我去莫斯科参加了第五届俄罗斯矿业论坛暨展会:MINEX 2009。



从吸引外资方面来看,俄罗斯企业非常欢迎中国投资者,俄罗斯Runge公司在演讲中认为中国投资者“Enthusiastic, knowledgeable, capable and cashed up”。最新消息,俄罗斯铝业公司(Rusal)将在香港首次公开募股欲从中铝吸金30亿美元,这是俄罗斯渴望中国投资的有力佐证。俄罗斯像Rusal这种需要吸引外资的公司为数不少。另外,从国内角度来看,近期几个项目似乎在暗示:“俄罗斯”也许会成为继澳大利亚、加拿大、拉丁美洲之后中国公司的又一“购物天堂”。2009年7月,东北最大民营企业辽宁西洋集团斥资近2亿,从赤塔鲁能矿业公司手中收购了俄罗斯别列佐夫铁矿矿权;中国黄金集团与俄企业列诺瓦集团控股合作共同开发金矿。

During the past 3 months, I traveled with a few clients to visit some Chinese suppliers of motors, pumps, valves and other industry supplies. As usual, we recommended the best local Chinese producers – their pricing levels were normally between Chinese-foreign joint ventures and local middle-sized and smaller producers, but their quality was acceptable for our clients.

Although the manufacturing technology for some of the products was not on the international level, the quality of most products exceeded my clients’ expectations. From manufacturing machinery, i.e. widely-used CNCs, to every step of the manufacturing process, casting, machining, welding, surface treatment and packaging - all of these met my clients’ criteria for qualified suppliers. The previous biggest problem affecting my clients' China sourcing strategy, QUALITY, seems now to have been effectively solved. Chinese suppliers' price and delivery, moreover, is usually comparatively better than competitors from other countries.

So what else is the problem then? The biggest problem arose afterwards. Most of the suppliers we visited did not have any agencies in any of my clients' countries, which, incidentally, made it easy to talk to the supplier directly and get lower prices. But for those products frequently requiring maintenance, it is simply not possible to rely only on the suppliers.

Let’s take the procurement of pumps for mining industries as an example. The pumps are usually used in tough (i.e. high pressure and corrosive) conditions. The lifespan of the key parts will be short, sometimes 20 days to 1 month. The buyer can save 1/3 of the total purchase value by sourcing pumps from China. But for maintenance, the buyer will have to keep enough stock for the key parts. If there is not enough stock and the buyer has to order parts from the Chinese supplier, it requires lead time of at least 1 month, plus shipping time. To set up a solid agency overseas is a large investment for many Chinese suppliers, so after-sales service is not an obstacle that can easily be overcome. Yet as long as they are fully aware of the problem, with thorough communication, Chinese suppliers and overseas buyers can come up with solutions, such as
  • Sourcing some general-use parts (i.e. seal parts) locally with the assistance of other Chinese suppliers
  • Negotiating with Chinese suppliers to have a ‘green channel’ to shorten lead times
  • Setting up a stock level system with supply chain management knowledge

As another example of problematic after-sales service, I can relate the following example. A South African client recently bought an engineering machine from a Chinese producer. The drive, which carried an international well-known brand produced in Germany, turned out to be faulty. The German brand, however, has an agency in South Africa, and so the client was expecting the agency would easily be able to solve the problem. Yet the client was told that it could take 3 months to get a new drive and that this was the normal lead time. The client then came back to the Chinese supplier directly and finally got a new one within 15 days.

From this perspective, the fact that Chinese companies do not have agencies overseas is not reason enough to dismiss their after-sales service completely. Indeed, for international companies who have agencies anywhere else, rigid systems and other factors can sometimes form stumbling blocks of their own. Sourcing managers will still need to invest a lot of time to conduct thorough research before they can decide where to source most profitably.
Crude oil reserve base, Ningbo.JPGOn September 24 construction commenced on the 5.4-million cubic-meter strategic petroleum reserve (SPR) in Dushanzi, Karamay city, in China's far western Xinjiang region. This marked the beginning of the second phase of China's building up of its oil reserves capacity. On September 25, Zhang Guobao, head of the National Energy Administration (NEA) and vice-minister of the National Development and Reform Commission, said at a national energy conference that China will work to increase its strategic crude oil reserves capacity to 90 days by 2020. At the present moment China is still far from reaching this level, with its national oil inventory covering only 21 days of its economy’s needs.

In the light of China’s growing dependence on imported oil, the country cannot rely on its existing capacity. As the world's second-largest oil consumer, China now relies on imports for about half of its oil needs. It imported 178.9 million tons of crude oil in 2008, an increase of 9.6% year-on-year, according to the National Development and Reform Commission. This tendency will only accelerate in the near future, when by 2020 China is expected to import 60% of its oil. The country’s lack of an SPR already caused problems during 2004-2008, during the period of sharp oil price surges. Yet right now, when China has the opportunity to take advantage of favorable oil prices, it cannot fully use it simply because it does not have enough reserves to store the relatively cheap (compared to last year) oil.

So far China has only completed the first phase of its SPR, with bases in Zhenhai, Zhoushan, Dalian and Huangdao, which are all located in the coastal areas of Zhejiang, Shandong and Liaoning provinces. The second phase, which has already started, includes building 8 new SPR bases by 2011, which will raise China’s strategic crude oil reserve capacity to 44.6 million cubic meters, or 281 million barrels. According to Zhang Guobao, China will start building the third phase of strategic oil reserves after the second phase is finished. If everything goes as planned, China will be able to avoid the economic disruptions it suffered in 2008 due to fluctuations in the world oil prices, and increase its energy security as a whole.

Image: Crude oil reseve base at Ningbo, Zhejiang province. (China Daily)

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