The pips are squeaking in China’s slowing economy and we in Australia, well and truly tethered to this monster, should understand that the dangers of a hard landing seem to be rising, not easing as it had seemed.

The country’s large and active small business sector is being squeezed, and their protests have forced a major about-face from the central government. So much so that in the space of three days the government has gone from saying there was no national problem, to launching a sweeping support package.

The squeeze is coming from China’s deliberate attempt to slow its economy and control inflation by squeezing bank lending.

It has hit small business hard, with a credit crunch being reported by many companies and mentioned anecdotally on official and other business websites.

So dramatic has been the reaction to the protests that in the space of three days the government seems to have changed tack on whether small and micro businesses were being damaged by the slowdown in lending engineered by the central bank and banking regulators.

The country’s State Council, its so-called cabinet, decided on Wednesday to launch an economy-wide assistance package for small and micro businesses who have been crunched by the crackdown on lending by the government.

Over the past year, China’s main regulators have ordered banks to lift the asset reserve ratio’s to a huge 21.5% for big banks and 21% for smaller institutions, while the central bank has also lifted interest rates six times to try and slow lending, especially on property, thereby trying to gently prick the property boom, and bring the country’s continuing inflation problems under control (which seems to be happening).

But the fallout from a story referred to in Monday’s Crikey on a loan scandal in the city of Wenzhou has spread dramatically and seems to have forced the apparent about face.

On Monday the country’s sovereign wealth fund emerged a surprise buyer of shares in the country’s four major banks, a move that now seems to have been designed to prevent a sell-off in Hong Kong last week, from spilling over into the Shanghai market when trading resumed on Monday after the National Day holiday week.

But could it also have been part of a plan to stabilise bank share prices ahead of the more dramatic announcement, via a news story on the official website Xinhua on Thursday, which revealed that the government has ordered the country’s banks to support financial strapped small and micro businesses.

The move came only three days after a report said there wasn’t an economy-wide problem with small businesses. But it now seems the country’s main day-to-day administrative group, the State Council, thinks otherwise. Xinhua pointed out that Premier Wen Jiabao chaired Wednesday’s State Council meeting, and also mentioned that a week earlier, the Premier had visited the city of Wenzhou to investigate the stories of a private lending scandal that had run off the rails, causing some businessmen to flee the city or suicide or to default on their debts.

So on Wednesday night it issued a statement revealing what was called “a new approach toward helping the country’s cash-strapped small- and micro-sized enterprises, pledging stronger financial and fiscal support to allow them to plough through current economic difficulties”.

“Commercial banks are prohibited from charging fund management fees, financial consulting fees and other unreasonable fees for their services to small firms.The State Council also offered more financing channels for small businesses to help them raise funds, promising a greater issuance of collective banknotes, bonds and short-term papers that involve two to 10 small firms.”

State Council urged banks to increase credit support for small businesses, “while lending to small firms whose credit lines are below 5 million yuan ($US786,000) should grow at a rate no lower than the average loan growth of the country’s banks. Small financial institutions that meet the loan growth target for small businesses may be subjected to lower required reserve requirements than the 21% currently required for major banks,” the statement said.

Xinhua said Wen Jiabao said banks should increase their tolerance for the non-performing loan (NPL) ratios of small enterprises, set targets for the proportion and growth of loans to small companies and reduce the cost of securing credit. To support small businesses, the State Council has also formulated fiscal policies, such as raising the tax threshold for small firms paying corporate value-added taxes and business taxes, forgiving banks’ stamp tax on lending contracts with small firms for three years and boosting the scale of special funds designed for small- and mid-sized enterprises.

All in all a significant package; all that is needed to make it a complete bailout is funding of direct payments to small businesses via the banks by the central government.

But what makes this announcement al the more intriguing is the chronology:

Last weekend Xinhua reported on the goings on in Wenzhou, in Zhejiang province and on Wen Jibao’s visit.

That colourful story stated:

“China’s small businesses turned to be the first to ring the alarm as the country is walking a fine line between fighting inflation and maintaining growth.

“Some entrepreneurs have disappeared and others have jumped off buildings almost every week since April in Wenzhou City, an entrepreneurial capital in eastern China’s Zhejiang province, Xinhua reported.

“The sudden disappearance of the business owners has revealed a surprisingly gloomy picture for the small and medium-sized enterprises (SMEs) in China.”

But in a report on Monday, Xinhua said:

“News of the incidents has even made waves in the central government. During a visit to Wenzhou on October 5, Premier Wen Jiabao urged financial support for cash-strapped small businesses. However, a multi-department investigation has shown that the crisis has largely been kept under control.

“However, the People’s Bank of China, or the country’s central bank, the Ministry of Industry and Information Technology (MIIT) and the National Bureau of Statistics (NBS) came to a different conclusion based on recent investigations conducted in southeast China’s Guangdong Province and the eastern provinces of Zhejiang and Jiangsu, the country’s most developed regions.

“A massive collapse of small businesses does not exist, even though some SMEs have been confronted with cash shortages. The number of SMEs keeps increasing, as broken-down enterprises are fewer in number than newly founded ones,” said Wang Wenbo, an NBS official, at a conference held by the Chinese Academy of Social Sciences on Monday.

Three days later and the crisis that “has been largely kept under control” has forced the country’s main day to day administrative body to produce a sweeping plan because it is now a a national problem, according to the Premier and State Council, as Xinhua reported on Wednesday:

“Small firms play an irreplaceable role in fostering economic growth, increasing employment, facilitating scientific and technological innovation and maintaining social stability, according to Wednesday’s official statement (reported by Xinhua) released after a State Council executive meeting chaired by Premier Wen Jiabao.

“The State Council admitted that some small- and micro-sized enterprises have encountered difficulties due to heavy tax burdens and difficulty in accessing financing. We must pay close attention to such problems,” the State Council said in the statement. “Financial and fiscal support will go to the nation’s real economy, particularly to small firms in sectors that meet the nation’s industrial and environmental protection requirements and can create more jobs for the country, according to the statement.”

Keep watching for more changes in policy, such as reductions in asset reserve ratios and even interest rates. China’s September inflation rate is out later today and will again be a poor figure. The trade surplus yesterday fell sharply as the growth in exports and imports also slowed more than expected.

Peter Fray

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