4.      Difficulty obtaining bank financing: Difficulty in raising capital by SMEs has become a critical bottleneck as commercial banks are generally very cautious about lending to SMEs. According to the China Association of SME, SMEs account for less than 25% of total bank loans.

 

As the cross-border financing industry has been moving payment terms away from traditional Letter of Credit (LC) to the riskier Open Account process, Chinese banks have become more reluctant to provide pre-shipment and/or post-shipment financing to exporters without ways to mitigate buyer risk.

 

Chinese banks find it difficult to extend credit in this financial environment. When banks do extend credit it is usually under very rigid conditions. Some exporters have had to pledge their production lines and factory buildings in order to get financing.

 

The shrinking external global demand has caused the closure of Chinese factories and mass exodus of migrant workers who have returned to the countryside without money or job prospects. This situation contributes to the risk of social unrest and has put pressure on the Chinese government to act. The government's reaction has taken the form of three policy measures designed to aid the export industry.

 

§ Boost domestic demand: In November 2008, China announced an aggressive spending initiative valued at 4 trillion yuan (i.e., USD585 billion), which over the next two years will aim to boost domestic demand. An example of this measure is a subsidy scheme available to farmers to help them buy household appliances (including designated brands) to increase demand for domestically produced TV sets, refrigerators, mobile phones, water heaters, air conditioners and computers. According to the Vice Minister of Commerce, China expects this household appliance purchase subsidy program to help stimulate rural consumption amounting to USD135 billion (920 billion yuan).
 

§ Support exports by increasing VAT rebate: China has also increased the export tax rebates of approximately 3,500 items in November 2008. This was the third time in the course of a year that China raised its export tax rebate. This rebate affects mainly items produced by labor-intensive industries such as toys, textile, garments and furniture — products which account for 25.8% of China 's customs tariff revenues. This increase in the VAT rebate is expected to ease financial pressure for export enterprises and enhance their competitiveness in the global market, which should help increase exports.
 

§ Monetary policy — loosened credit: The People's Bank of China has made several changes to its monetary policy to help ease liquidity conditions and boost corporate financing by cutting interest rates, reducing reserve requirements for banks and lifting administrative controls on banks' lending business. These changes have contributed to a sharp growth in RMB loans. In the first quarter of 2009, RMB loans outstanding soared 29.8% compared to the fourth quarter in 2008. This growth rate is the highest on record as banks actively strive to extend credit with the government's encouragement.