China's Rate Hikes Put Pressure on SMEs

 China has raised its benchmark interest rate three times since October, accompanied by several reserve ratio hikes, while those moves to tame inflation have put considerable pressure on the fundraising of the nation’s small and medium-sized enterprises （SMEs）, the official Shanghai Securities News reported on Friday.

“Consecutive rate increases pushed up our debt costs, while rising cotton prices and labor costs made the situation even worse,” the head of a textile enterprise in China’s eastern Zhejiang province told the paper.

In Jiangsu and Zhejiang, where private enterprises prevail, SMEs have to bear rising costs of raw materials and labor, and higher debt pressures caused by consecutive increases in interest rates, the paper said.

China’s newly added credit lending is expected to exceed RMB 1 trillion in January, a significant decrease compared with RMB 1.39 trillion over the same period last year, the report said.

Since the beginning of 2011, the central bank has implemented a “prudent” monetary policy. China’s domestic banks have also imposed stricter controls over new lending, putting SMEs in an even harder situation, the paper said.

Recently, private lending institutions such as investment and guaranty companies have raised lending rates as banks tightened credit lending and the central bank raised interest rates.

“Interest rate hikes have the greatest impact on SMEs, rather than state-owned large companies, because banks will offer favorable lending rates in order to compete for the business of big enterprises. However, SMEs are relatively vulnerable and have to digest the cost by improving profit rates,” the paper quoted an unnamed analyst as saying.

CCTV commentator Zhang Hong told the paper that raising interest rates is a double-edge sword because it curbs inflation but places greater burden on enterprises.

This rate hike may affect export-oriented enterprises, especially SMEs in coastal regions, Zhang said. He suggested the central bank offer preferential rates for industries driving consumption and employment.

In this rate hike, the range of increases in deposit rates is larger than that in lending rates, which has been widely seen as a positive attempt by the central bank to balance inflation control and real economic growth stimulus, the paper said.

China raised its benchmark one-year lending rate from 5.81% to 6.06% on Tuesday. The one-year deposit rate rose from 2.75% to 3%.

（source from：business China）