How did Chinese private companies overcome financing difficulties?
By Zhang Xinyuan
Slowing global and domestic economic growth, trade frictions between major economies and rising operational costs strained China's manufacturing sector in 2019. On top of that, private manufacturing businesses in China faced even bigger challenges mainly because of financing difficulties.
Yanxin Science & Technology Incorporated Corporation is based in Jiangyin, one of China's major manufacturing bases located in eastern China's Jiangsu Province. It provides large-scale heating furnaces to some of the largest petroleum and petrochemicals producers in China. Though the value of company's average annual production reaches over 2 billion yuan, Yanxin still finds it difficult to raise funds or get loans at a reasonable interest rate as a private company in China.
How did the company solve this problem? What other challenges does the company face as a private business in China? And what does the future hold?
Yanxin President Zhou Guohua talks about how private manufacturing companies are doing in China.
Financing woes of private businesses in China
"Financing has always been private businesses' sore spot in China," said Zhou. However, he believes that Yanxin is one of the lucky private businesses in China for it can at least get bank loans since it has several hundred acres of land, factories and equipment to use as collateral.
Zhou said they had found a couple of companies in a similar position as Yanxin to form a guarantee circle. "We can serve as each other's guarantor when applying for bank loans," he explained.
"Besides, after operating in the region for over three decades, the banking system has developed some trust in our company, enough to give us loans," he said.
"It's just that the loan interest rate is rather high. Some commercial banks will raise interest to as high as 30 percent or even higher," Zhou said. "So the cost of financing for private businesses, like us, is rather high."
High financing cost, coupled with other causes, such as slow cash flow in large-scale manufacturing industry, has resulted in a low profit rate of under 4 percent.
For smaller manufacturing businesses that do not have land or properties to use as collateral or can not find bigger businesses that the banks recognize as guarantees, it's very difficult to get bank loans, no matter how high an interest rate they are willing to shoulder, Zhou said.
Although private sector contributes about 60 percent of China's GDP and small and medium-scale enterprises make up majority of Chinese companies, yet they have been battling with financing difficulties since banks see private businesses, especially the small and medium-sized ones, as riskier than state-owned companies, which are implicitly guaranteed by the government.
The Chinese government is clearly aware of the problem and have been emphasizing the importance of supporting private companies through high-profile public statements.
Since 2018, Chinese President Xi Jinping and Premier Li Keqiang have been calling for more supportive measures for private companies, especially small and micro-sized enterprises, including improved access to financing.
"It takes time for the effects to trickle down," Yanxin president said in April 2019.
Though financing hasn't gotten easier or cheaper for Zhou's company, Yanxin did get broader access to the industry and significantly more orders from state-owned companies after Chinese President Xi Jinping's speech on supporting private businesses in November 2018. "Now one third of our orders come from state-owned companies," Zhou said.