* China's crackdown on leverage continues
* Credit squeeze impacts investment decisions
* Some companies go to non-traditional lenders, markets
By Umesh Desai
HONG KONG, June 26 (Reuters) - China's small-to-medium companies, already weighed down by massive debt, now also face a funding squeeze as regulators push banks to rein in riskier corporate loans - including the short-term credit on which many depend.
While China's large and state-backed entities maintain access to cash, smaller firms say they are finding it tougher to get loans from state-owned banks, forcing them to think twice about investments and, for some, seek costlier alternatives.
In January 2016, short-term bank loans - usually up to one-year - to corporate customers made up China's fastest growing lending segment to non-financial borrowers at 4.8 percent year-on-year, data from Moody's Investors Service and the People's Bank of China showed.
That segment is now registering the slowest growth in the same category of lending, at less than one percent in March this year, the data showed.
For managers like Davis Cai in China's manufacturing heartland along the Pearl River, the squeeze not only means his masonry company Shenzhen Leeste Industry has to be careful managing its cash, but more and more of its customers are struggling, threatening a vicious cycle of non-payment.
"We are afraid to do big projects because of this, we are only doing some small projects instead," Cai, the firm's export manager, told Reuters. "If there aren’t any changes, it will be really difficult for us."
The company, whose product line includes statues of angels, Catholic saints and Buddhas for high-end developments, counts the Trump International Hotel and Tower in Vancouver, Canada, and the Doha Metro in Qatar as past projects, as well as Harbin Pharmaceutical's Renaissance-style offices in northern China.
The company has had to resort to borrowing from private lenders, often through middlemen introduced through friends and contacts, paying rates at least "twice or three times higher" than regular banks, he said.
"The pressure is very great ... We need to borrow from these people," he said.
Stephen Chow, a sales manager at Guangzhou Provision Electronics Co. Ltd, which designs and manufactures electronic displays, said that while his company has been able to borrow, the bar at state-run banks has been raised in recent years.
"It usually takes a longer timeframe to borrow money from state-owned banks, around 60 days to 90 days. They have to get approval from people with higher authority, so it takes a longer time," Chow said.
"We are being more careful with our investment."
Borrowing pain is not new to corporate China.
Policymakers last year focused on "supply-side reform", aiming to cut debt in sectors with excess capacity, such as iron and coal production, leading to a spate of bond defaults.
But while tighter credit may help bolster corporate China's overall creditworthiness and remove surplus capacity, it also drives financing activity elsewhere, to non-traditional lenders and other parts of the capital markets.
Meanwhile, investors are increasingly demanding greater yield for riskier debt assets.
Bond yields for top-rated issuers are up about 75 percent from their 2016 trough in October. The additional yield that investors demand on lower-rated borrowers has more than doubled since the end of last year to about 36 basis points late last week.
Syndicated offshore loan volumes to Chinese companies have also fallen in the first four months of this year to less than a third of what they were in same period last year.
Issuance of perpetual bonds, which do not have a maturity date, has soared this year. The increase has raised concerns that the true debt position of some corporations is being concealed because perpetual bonds are considered equity, not debt, for accounting purposes.
For policymakers, tighter credit conditions are exactly what the doctor ordered.
"In China it is the availability of credit rather than its cost that matters more ... at the end of the day, they have to pass it on (to customers)," said Sean Darby, strategist with Jefferies.
At the same time, Darby said, "they allow a lot of companies to service their debt pretty much without pushing them into insolvency."
Analysts and even many business leaders agree regulators' efforts to limit the availability of credit to riskier borrowers will improve China's corporate health and remove questionable investment practices.
"As long as you have collateral and good standing, I don't think it is difficult to get corporate financing," said Huang Yongpeng, president of the Dalang Federation of Industry and Commerce in the Pearl River Delta region of Dongguan.
But for Foshan Junjing Industrial, a tile and ceramics manufacturer in Guangdong, the squeeze and softer economic conditions more generally mean a slower pace of expansion.
"We are trying to focus on providing services instead of investment," said Foshan's sales department manager, Johnny Lee.
Additional reporting by Katy Wong and James Pomfret in HONG KONG; Writing by Sam Holmes in SINGAPORE; Editing by Sonya Hepinstall