Zhejiang's Market Rescue Plan

By Yu De, Zhang Yong and Chen Zhouxi
Published: 2008-08-21

From Nation, page 12 and 14, issue no. 381, August 18, 2008
Abridged Translation by Ren Yujie
Original article
: [Chinese]

China's Zhejiang provincial banking commission has mandated a 7 billion yuan credit line to help local small and medium enterprises (SMEs) ride out a perfect storm created by tight credit, yuan appreciation, and increasing costs.

The decision came after an August 6 meeting between the commission and a coalition of SMEs who have increasingly lobbied for market-saving measures.

Such meetings had been frequent in Zhejiang of late, where 20% of all businesses experienced losses in the first half of 2008. In response, Zhejiang authorities have led the charge to intervene in the market by supporting local SMEs in reducing taxes and opening up more credit.

These market-saving measures have kept the coals red in the dispute on whether local government should intervene on behalf of struggling businesses and if so, exactly how to do it.

Zhou Dahu, the director of Wenzhou's Tobacco Product Accessories Association, said there were over 3,000 lighter-producing businesses in Wenzhou at the peak in 1993, but that the number had decreased to 600 or 700 in recent years. Today there are no more than 100 still in operation, he added.

On July 7, Zhejiang provincial officials rushed a report on improving the business climate for local firms to the National Development and Reform Commission (NDRC) and the Ministry of Agriculture (MOA), stating that many Zhejiang private businesses were starting down a crisis.

The report said that some problems at the macro-level could not be solved by local authorities nor SMEs themselves.

In fact, this was the third time that Zhejiang province submitted such research reports to central government authorities.

How to help SMEs to "pass the cold winter" would become the local authorities' "obligation and important responsibility", said Wang Huoping, secretary of Hangzhou's Communist Party committee said at APEC Business Advisory Council on August 2.

Hangzhou government was researching a series of policies to help SMEs do just that. Zhejiang authorities had implemented combinations of preferential tax policies, guaranteeing loans for firms, and helping them overcome fundraising hurdles.

On July 15, the Zhejiang commerce and banking officials published guidelines saying that limited liability companies and unlisted joint-stock companies with stockholders fewer than 200 could apply for loans backed by shares in their stock.

Li Chengjun, from Zhejiang Jiabaili Holding Group, said he was ecstatic at the news: "After the announcement we called the bank and ultimately got 80-million-yuan with the help of the industrial and commercial departments and the bank."

A toy maker based in Zhoushan also said: "The situation is much different. We can get loans and my business can survive," adding that he had considered closing the plant before.

The Chinese government introduced tight credit controls early this year to curb inflationary pressure. For the first quarter of this year, new loans in Zhejiang totalled 144.8 billion yuan, a reduction of 31.8 billion yuan compared to the same period last year. SMEs that succeeded in loan applications had also reduced by 11664 companies.

The latest turn of event in Zhejiang constrasted the tighthening policy. At the August 6 meeting, it was agreed that to create the 7 billion credit line, China Construction Bank's Zhejiang Branch would provide 5 billion yuan, and both the Postal Saving Bank of China and Hua Xia Bank would provide 1 billion yuan each.

Beyond the loans, the Zhejiang SME Bureau, Zhejiang provincial office and Industrial and Commercial Bank of (ICBC) China's Zhejiang Branch were planning to issue corporate bonds jointly with SMEs. A source from the Zhejiang SMEs Bureau revealed that ICBC's Zhejiang Branch was choosing 30 SMEs and preparing to issue a three-year corporate bond valued at three billion yuan.

While kick-starting some previously struggling businesses, Zhejiang province's market rescuing policies also reignited public debate on the issue.

Some opposition stated that less competitive businesses should be eliminated in order to spur an industry shakeup that would leave it more healthy.

However, Li Zibing, chairman of the China Association of Small and Medium Enterprises, said: "It's smarter for the government to subsidize SMEs as it must settle laid-off workers if businesses stop production.” He added that it was not so easy to create a brand or cultivate high- technology businesses if all labor intensive-ones were suddenly kicked out.

Meanwhile, some international investment banks still believed Zhejiang authorities' were "nannying" businesses there. Although SMEs needed government support, their survival depended much more their own endeavors," said Sun Zhengyi, board director of Japan-based Softbank Group, a venture investment company specializes in information technology sector.