China loans hard to get - Smaller enterprises left dry as bulk of lending goes to big projects

The Wall Street Journal Asia
By Jason Leow
14 May 2009

LANXI, China -- Textile-factory owner Chen Zengrong is having trouble getting loans -- as are many small enterpreneurs around China -- despite a torrent of credit unleashed by state banks to help the economy out of its slump.

Mr. Chen was turned down five times recently by banks here before he found money -- enough to last about a month -- through an online trading site that supports entrepreneurs.

"Every little bit of cash helps for small businesses like mine," says Mr. Chen.

China's central bank said this week that of the 591.8 billion yuan ($86.8 billion) lent by China's banks in April, three-quarters went to "nonfinancial and other types of companies" -- the large state-owned enterprises and megaprojects the government has lined up as part of its economic-stimulus plan.

That has left behind the country's 40 million or so small and medium-size enterprises -- which employ at least 75% of China's workers and produce 68% of industrial output, according to official figures -- despite repeated calls by the government to help them. With the government estimating that more than 20 million rural migrants are looking for work, better funding for smaller businesses is seen as a way to get people jobs.

Mr. Chen's son, Chen Gang, says their factory here in Lanxi, an industrial city in eastern Zhejiang province, employs 50 workers and has annual revenue of about $1.5 million, producing a thin profit margin.

In the past, Mr. Chen says, the business generated sufficient cash to avoid bank borrowing. But the Lanxi textile industry has become highly competitive: over the past decade, some 20,000 textile companies have set up shop in the area. In September, as overseas demand dwindled, exports started to fall at the Guangdong province clothing factories that buy Mr. Chen's textiles.

In October, Mr. Chen and his son reached out to the local branches of the China Construction Bank Corp. and Agricultural Bank of China Ltd., two big state lenders. The Chens say they asked for a total of about $45,000.

Loan officers dropped by the factory and the Chens even invited one of them out to dinner as a thank-you gesture, Chen Gang said, declining to name the bank.

After two months of the Chens going back and forth to the banks, both institutions turned down the loans. The banks said their headquarters didn't think the business had solid prospects, according to Chen Gang. He says the banks also pounced on a late credit-card payment incurred by the elder Chen as evidence he lacked "personal integrity" -- a stated criterion to get a loan in a country that doesn't have a credit-scoring system.

The Chens were discouraged. But in November, when they heard that the government had called on banks to loosen credit, they reapplied. Within two weeks, they were rejected again.

"You would think they would understand how much we need help, but they didn't care," said Chen Gang.

Representatives at the Lanxi county branches of China Construction Bank and the Agricultural Bank of China didn't respond to specific questions about the Chens' applications, saying only that their refusals were based on bank guidelines.

"We look closely at the financial situation of each enterprise. The entrepreneur's personal credibility also matters to us," said a representative at Agricultural Bank's loan department in Lanxi county, speaking in general terms about lending procedures.

A spokesman at CCB said the bank has been pushing more loans to small businesses, with approval time now slashed to an average of three days, from up to several months.

Banks often ask small businesses to provide collateral but won't accept farmland or factories, which entrepreneurs can readily offer. Lenders say rural land parcels are usually collectively owned by villages, and therefore can't be accepted for individual loan applications, and factories aren't valuable enough.

Lenders will often ask borrowers they deem to be high-risk to provide backing from companies that serve as guarantors to small companies' bank loans. China has some 3,300 credit-guarantee companies: About a tenth of those are government-backed; the rest are run by private businesses that banks typically don't trust, analysts say. Some entrepreneurs find their services too expensive and success far from assured.

Alternative financing services are springing up to help small businesses shunned by banks. In December, the Chens heard Alibaba.com Ltd., operator of China's largest online business-to-business trading site, was offering customers a chance to secure credit with local lenders without going through the usual application process. The Chens decided to give it a shot.

Starting in 2007, Alibaba has worked with China Construction Bank in the eastern city of Hangzhou to help small businesses obtain loans. Applicants are asked to bundle their credit requests together and serve as each other's credit guarantors, ridding them of the need to supply collateral. The program has since been expanded to other parts of the country, and the giant Industrial&Commercial Bank of China Ltd. has become a partner.

Borrowers' credit payments are tracked closely and defaults publicized, which discourages late or non-payments, said John Spelich, Alibaba's vice president of International Corporate Affairs.

The Chens and two fellow factory owners put in a joint bid for nearly $30,000, of which $12,000 was for the Chens.

The Chens didn't get the full amount they asked for but ended up with 30,000 yuan ($4,400), enough to pay for raw materials and workers' salaries for another month. "Who else can we turn to in an economy like this?" asks Mr. Chen.