China's SMEs struggling for land and private capital

Zhou Bailin has been feeling a little jaded recently. His company just received an order worth over 400 million yuan (about 65.6 million U.S. dollars), but he had to hold back from the lucrative deal.

"My factories have now all stalled because we could barely finance continued production," Zhou said.

Zhou is the general manager of Giga Solar Co., Ltd., located in Xing'an County in south China's Guangxi Zhuang Autonomous Region.

The company, which produces crystalline silicon solar cells, has run out of capital because of anti-dumping duties imposed by the European Union for over a year.

The company could easily resume production if Zhou could obtain circulating capital of 50 million yuan, which is impossible at the moment, according to Zhou.

"I feel like I am stuck in a moor and there seems to be no financing straw for me to clutch at," he said with a sense of helplessness.

This is just an example of what China's small- and medium-sized enterprises (SMEs) are going through.

According to a recent report published by Standard Chartered Bank, the confidence index of China's SMEs in the second quarter of this year fell by 4.47 percentage points after bouncing in the first three months.

The report shows that SMEs are cautiously optimistic about an economic recovery amid China's decelerating growth, and their confidence index has decreased in terms of operation, investment and financing.

Fiancing pains

Zhang Liangjie, board chairman of the Liuzhou Longjie Automobile Fittings Co., Ltd., a powertrain component manufacturer in Guangxi, said that his company needed loans to upgrade its production line due to high product requirements by overseas customers.

"We need up to 10 million yuan to complete the upgrading process, but it's hard to find the money," Zhang said.

The financing troubles will disrupt the development plans of emerging companies like his, said Zhang, who had his factories built in the industrial city of Liuzhou, home to several well-known brands such as Liuzhou LMZ Co., Ltd. and Guangxi Golden Throat Group.

Banks are reluctant to grant loans to SMEs, which usually lack collateral and sufficient certificates.

Yuan Chiping, deputy director of the Center for Studies of Hong Kong, Macao and Pearl River Delta at Sun Yat-sen University, said that what deters financial institutions from providing loans is that SMEs make too little profit.

Adding to the financing pains are additional costs, said an executive of a small local company in Guangxi, who refused to be named.

"Suppose we borrowed 10 million yuan. We would have to take out money to cover additional costs like accruement, deposit, and consulting fees, among others, after which only 8 million yuan would be left," said entrepreneur.

Lack of land

The lack of sufficient land is another pain for the heads of China's SMEs, which are trying to edge each other out for precious and limited land in various cities in China to build industrial parks.

"The Foxconn company asked us for 10,000 mu (about 667 hectares) of land to build their industrial park here, but we were just unable to provide it to them," said Luo Huazhong, director of the development and reform commission of Guangxi's Yulin City.

Luo said the problem is shared by many other companies, as land resources are limited and it has been quite difficult for local governments to acquire land.

"Take Guangxi for example. Each year we need about 30,000 hectares of land for new large projects in the region, but only 12,000 hectares can be allocated by the central government," said the official.

Insufficient land resources have restricted the number of incoming projects, and companies have to pay deposits to reserve the limited land, he added.

To help SMEs tackle the difficulties, local governments in China have put forward various preferential policies to offer support, but such efforts seem to have been in vain.

Chinese SMEs had mediocre performance in the eyes of Forbes: only 63 such companies (including some from Hong Kong) were listed in the top 200 small- and medium-sized public companies in Asia -- the lowest number in five years.

Despite the flat performance, experts believe that there is still potential to be tapped in the future growth of such companies, but new measures are required to tame the financial market and manage land that is occupied but never used.

Zuo Xiaolei, chief consultant to the president of China Galaxy Securities Co., Ltd., said that the government should assign private banks to serve local SMEs by proving financial support, which is a way to optimize the allocation of financial resources.

Zuo's idea was echoed by Yuan Chiping, who argued that a government-guided platform needs to be established with designated financial institutions.

"In this way, private capital will flow into SMEs more smoothly via the platform, while the companies are supervised by local governments on the platform," said Yuan.

When it comes to the urgent need for land, Jin Tao, an economist from Xiamen University, said that governments should set the bar high when they draw investments so that precious land resources could be used more effectively.

"It is a smart idea to invite high-tech and environmentally friendly companies that occupy less soil and make best use of the local advantages," Jin said.

Jin added that a land reclamation mechanism should be in place to manage the idle land and put it to use where it is most needed.