BEIJING China's cabinet is considering creating a government agency to facilitate lending to cash-strapped small and medium-sized enterprises that have been driven to loan sharks and shadow banks by a Beijing-led credit clampdown, two independent sources said.
Many of these SMEs, a pillar of the economy, are drowning -- squeezed by a firmer yuan, falling export orders and rising raw material, land and labour costs.
The State Council was studying a proposal to establish a vice ministerial-level government agency to throw SMEs a lifeline and prevent domino defaults that could spook financial markets, raise joblessness and stir social unrest, two sources with direct knowledge of the plan said.
The Small and Medium Enterprises Administration would be established in either 2012 or 2013 after approval by the National People's Congress, or parliament, which convenes in March, the sources said, requesting anonymity.
The administration would come under the direct jurisdiction of the cabinet and would formulate policies encouraging banks to lend more to SMEs and help them list at home and abroad, they said.
"The biggest difficulty SMEs face is (a lack of) funds ... (state) banks do not trust SMEs," one source told Reuters. "The administration will come up with policies to encourage bank lending to SMEs, coordinate with other government agencies, approve listings of SMEs and help them find talent."
The cabinet spokesman's office declined immediate comment.
SMEs are a backbone of the economy, accounting for 99 percent of the country's 43 million enterprises, 60 percent of gross domestic product, 50 percent of government tax revenue and 80 percent of urban jobs, according to official figures.
But more than 90 percent of SMEs complain of difficulty borrowing from banks under a credit clampdown by Beijing, media quoted an official from the Federation of Industry and Commerce as saying. Many have turned to the underground lending market -- which pools money from individuals and companies -- at annual interest rates as high as 100 percent.
Staggering rates a dozen times China's benchmark lending rate have pushed some companies to the limit. In some extreme cases, creditors have hired hitmen to hunt down and take out delinquent SME bosses and their spouses, the source said.
Few places have been more hard hit than the wealthy eastern city of Wenzhou, where the bosses of at least 80 companies have gone into hiding because they could not repay loans borrowed on exorbitant interest rates, the official Xinhua News Agency said in its online edition.
The central bank estimated China's underground lending market was worth 2.4 trillion yuan (331 billion pounds) as of the end of March 2010, or 5.6 percent of total lending.
In Wenzhou, outstanding private loans rose to 110 billion yuan ($17.2 billion) this year, up from 80 billion yuan last year, according to China's central bank, although many analysts say the figure greatly underestimates the size of the market.
"No enterprise can afford annual interest rates of 100 percent on top of 40 percent in taxes," said a second source with knowledge of the plan to set up the administration.
Underscoring the severity of the problem, Premier Wen Jiabao visited Wenzhou during the week-long National Day holidays earlier this month.
During his two-day visit, Wen told state banks to lend more to SMEs and tolerate higher levels of bad debt from them, while demanding a crackdown on high-interest lending by underground financial institutions and tax breaks for SMEs.
Even with the boost in support, the credit tap is more likely to trickle than gush. Chi Sun from Nomura in Hong Kong said it would be unrealistic to expect all SMEs to borrow from banks as demand outstrips supply.
"We need to liberalise our financial sector so that all credit demands can be met," she said, adding that Beijing should work towards turning the underground loan market into an above-board business.
Days before Wen arrived, Zhao Yide, 46, resigned as mayor of Wenzhou, months after he declared there was no industrial "hollowing out" in the city in Zhejiang province. He was replaced by Chen Jinbiao, 48, who championed private enterprises in Zhejiang, media reports said.
State banks generally prefer to lend to big state-owned enterprises, parcelling out loans to larger and relatively less risky customers from a pool tightened by nine increases in bank reserve ratio requirements since last October.
After the premier's trip, Bank of China Ltd (3988.HK) (601988.SS), one of the country's big four banks, pledged to extend 120 billion yuan in new loans to small enterprises this year, according to the official SME website www.sme.gov.cn.
Following Wen's visit, at least two runaway SME bosses, including Hu Fulin, president of Zhejiang Centre Group, one of the country's biggest spectacles makers, returned home this week, state media said.
Denying media reports that he had joined the band of fleeing SME bosses dodging billions of yuan in debt and unpaid wages, Hu told Chinese media he had gone to the United States to get help from friends and collect delinquent payments. ($1 = 6.349 yuan)
(Editing by Brian Rhoads and Chris Lewis)