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The Coming Winter May be Cold Enough for Wenzhou’s SMEs

the coming winter may be cold enough for wenzhou SMEs

“This winter, many enterprises will shut down or close up for failing to pay their loans.” said Cai Huantian, president of Zhejiang First Dress and vice chairman of the Wenzhou International Chamber of Commerce. He estimated that a batch of Wenzhou’s small- and medium-sized enterprises (SMEs) would be confronted with the trouble of paying back their loans before the traditional Chinese Spring Festival.

Cai added that, most products from Wenzhou’s garment sector are aimed at the European market, and the debt crisis in Europe has resulted in a shrinking demand with fewer orders, declining export and nearly zero profit. Meanwhile, some enterprises borrowed big loans from commercial banks and private lenders at the beginning of the year. Now, these loans are gradually due in the coming winter, but their profit drops so much that they are unable to pay back the loans.

According to the statistics from Zhejiang Provincial Statistics Bureau, the profits of industrial enterprises above designated size in Zhejiang Province reached 120.91 billion Yuan in the first half of 2012, a 17.5% year-on-year fall, which is 15.3% higher than the national average.

Mr. Li, a textile factory owner in Wenzhou, noted that, his biggest headache at present is his accumulated loans of 10 million Yuan, which will be successively due this year and next year, while on the other hand, banks, petit loan companies and private lenders are recovering loans.

Mr. Li added, most of these loans have been invested into fixed assets, including plant construction and machine upgrading etc in recent two years. “Unluckily, though our capacity multiplies, our orders decline gradually. This year, the orders drop by half, making the profit drop by a significant 40%. Considering our routine expenses on labor cost and machine maintenance etc, our monthly profit on average is less than 500,000 Yuan.” said Mr. Li. “At the same time, we have to pay back around 600,000 Yuan of loans every month from the second half this year, which makes two ends hard meet.”

Mr. Li said, some of his loans are borrowed from commercial banks through the local chamber of commerce, and some from petit loan companies and private lenders. Although the interest rate on loans from banks is relatively low, many banks generally charge additional fees, making the final financing cost 30% higher than the benchmark interest rate. In addition, as Mr. Li’s factory is of small size, it is not easy to get enough loans directly from banks.

Although there are more orders from this October on, it seems not good news for Mr. Li. New orders require new raw materials. If he pays back loans first, there will be no money left for raw materials. If he goes for private loans, the financing cost will be too high.

As the statistics from Wenzhou Private Lending and Borrowing Registration Center show, the average monthly interest rate on private loans reaches 1.86% in September, equal to a yearly interest rate of 22.3%. “Nowadays, borrowing high-interest-rate loans means committing suicide in a slow way, but refusing is a quick death.” said Cai. At present, many SMEs are troubled with high financing cost and loan repayment. Cai added, lots of businessmen believe it hard and slow to make money from manufacturing, so they begin to invest in different speculations, thus increasing enterprises’ financing cost. In spite of various policies pushed by the local government to support SMEs’ financing, the implementation is in fact a problem.

Experts believe that the high financing cost has been an unbearable burden for some enterprises, an obstacle for the development of the real economy.

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