At present, Chinese SMEs are still not fully recovered from the impact of the CCP virus epidemic and are still struggling to cope with weak consumer demand, rising operating costs and tightening credit from banks. The plight of these companies adds to the uncertainty of China’s economic recovery.
The Wall Street Journal reported on May 3 that surveys show many small businesses in China are reluctant to hire more workers, and some say they may close if business conditions don’t improve significantly.
Nearly 19 percent of small businesses in China went out of business last year, compared with 6.7 percent in 2019, according to a study released in March by Tsinghua University involving more than 50,000 companies nationwide.
China is home to tens of millions of small and medium-sized private businesses (including restaurants and stores), which are a key component of daily economic activity. These businesses provide up to 80 percent of urban jobs and at least half of tax revenue.
Liu Ning, a 49-year-old businesswoman who runs a marketing agency in Beijing, fears her company may not last long.
Liu’s company, which had more than 20 employees, laid off more than half of its staff last spring to survive the outbreak, leaving only seven people behind, and until now, business has not fully recovered.
The company has been denied business loans by several banks, and Liu and his partners have had to go to online lenders that charge high interest rates to avoid running out of cash.
Liu says the epidemic has hit so hard that her company is barely able to recover, and its business has shrunk by about two-thirds compared to what it was before the epidemic.
A recent index released by the Economic Times and China Post Savings Bank shows that SMEs have not yet recovered to pre-epidemic levels, which stood at 44.3 in March, up 1.8 percentage points from a year earlier. The index is below 50, indicating softening business conditions.
Companies face difficulties in lending due to insufficient cash flow
The report said there are many companies still facing serious cash flow dilemmas this year. A survey of more than 10,000 small businesses released in March by Peking University and Ant Group found that only 15 percent of companies surveyed had enough cash flow to sustain operations for six months or longer, down from 19 percent in the third quarter of 2020.
Zhang Lei, 32, runs a consulting firm in Nanning, Guangxi, that helps developers build and sell homes. Zhang lost more than $150,000 last year when several clients defaulted on payments.
After firing more than half of its staff, Zhang’s company is still facing a cash shortage. He said his loan applications have been rejected by several banks, mainly because he has no equipment or property to use as collateral.
Zhang Xiaoxi, a Beijing-based analyst at research firm GaveKal Dragonomics, said government policies introduced during the outbreak mostly favored more established small and medium-sized enterprises with existing ties to banks. And the recent overhaul of fintech platforms that offer alternative sources of credit, such as Ant Group, could put further financial pressure on SMEs.
The Communist government wants domestic banks and financial institutions to support SMEs, but banks themselves do see SMEs as a riskier sector, said Ron Thompson, head of Asia restructuring practice at professional services firm Alvarez & Marsal.
In addition, since this year, rising raw material prices have put cost pressure on many companies.
Ni Ni, owner of a plastic buckle production factory in Rui’an, Zhejiang province, China, said soaring costs have caused profit margins to drop to almost zero.
Chinese people are reluctant to spend
Official figures released by the Communist Party of China (CPC) gave an optimistic picture, with gross domestic product (GDP) increasing by 18.3 percent year-on-year in the first quarter, but only 0.6 percent quarter-on-quarter.
Economists point out that China’s GDP plunged 6.8 percent in the same period last year, and that the 18.3 percent year-over-year growth rate is not informative due to the low base, while the seasonal chain of events data is more telling.
Some economists believe that China’s economic rebound may have peaked and that the uneven recovery continues to pose challenges, with the country’s economy still driven by government investment and real estate and overall weak consumer spending to support growth.
Chinese residents’ fears about the Communist Party’s viral outbreak have not yet subsided, and in the midst of the epidemic, many have seen their incomes reduced and are no longer as willing to spend as they once were.
Wang Limin, who runs a snack store selling duck necks in downtown Beijing, said customers have become more cautious in their spending than before, and despite a pickup in customer traffic, sales this year have not been as good as last year.
Zhang Lu, 33, runs a barbershop in Beijing. Last year, he said, the barbershop lost 20 percent of its revenue due to the epidemic.
He says fewer customers are coming in for color and perms now, and people are not as generous with their money.
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