China Manufacturers May Suffer as Lenders Favor Roads, Railways

By Luo Jun and Li Yanping

Nov. 18 (Bloomberg) -- China's small manufacturers are likely to be starved of cash even after the government directed banks to increase lending as part of its 4 trillion yuan ($586 billion) plan to buoy the economy.

Banks are likely to steer money to the public works that Premier Wen Jiabao is making a priority in the stimulus package unveiled last week. Those projects are considered a safer bet than manufacturers: Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government figures.

``Small businesses will continue to be in despair,'' said Wang Tao, an economist at UBS AG in Beijing. ``Despite the government's drive, banks are likely to concentrate on risk-free infrastructure projects.''

The stimulus allocates money for railways, roads and power grids and calls for an increase in lending for small and medium- sized companies, whose output represents 60 percent of gross domestic product and 75 percent of urban jobs. The banks, focused on returns to shareholders, may favor the state-backed projects, weakening the impact of the package.

``Default risks are almost zero,'' said Lu Zhengwei, chief economist at Industrial Bank Co. in Shanghai. ``The reluctance of banks to lend to smaller businesses will undermine the effectiveness of the stimulus package.''

Targeting Public Works

Bank of China Ltd. and China Construction Bank Corp., two of the nation's four largest banks, said last week they favor lending for the railway and roads outlined in the plan.

The government will provide funding for about a quarter of the 4 trillion yuan stimulus, unveiled Nov. 9, with the rest coming from local governments, state-owned banks and companies, Mu Hong, vice chairman of the National Development and Reform Commission, said Nov. 14.

The nation's four largest banks, which account for more than half of total loans, have already lowered their lending to smaller companies to reduce risk from slowing growth at home and cooling demand in the U.S., Europe and Japan, according to the banking regulator. The International Monetary Fund predicts all three economies will shrink next year.

Liu Yingshui, owner of mushroom exporter Yin Zhao Food Co. in central Hubei province, said it is getting harder to obtain financing.

``I have heard all this talk of easing credit for small and medium-sized companies, the dropping of loan curbs and most recently the stimulus package,'' Liu said in a Nov. 14 interview. ``None of that helps us.''

Credit Scarce

Liu said Agricultural Bank of China offered him an 80 million yuan credit line early this year. His company got a quarter of the money and last week was told that it won't receive any more because the bank is cutting advances to exporters.

Zhou Qingyu, a Beijing-based spokesman at Agricultural Bank, didn't respond to a request for a comment left on his mobile phone and at his office.

Nationwide, loans to small businesses by China's 20 biggest banks rose 6.2 percent to 3.2 trillion yuan in the first six months of 2008, less than half the 14.1 percent growth in overall lending, according to the China Banking Regulatory Commission.

``Just as the government finds it extremely hard to limit lending when the economy is booming, they'll find it equally hard to push for lending during the current economic downturn,'' said Li Wei, an economist at Standard Chartered Plc in Shanghai.

Loss Makers

About 18.3 percent of Chinese industrial companies with more than 5 million yuan of annual sales, of which 89 percent are small and medium-sized businesses, recorded losses in the first eight months of this year, according to the industry regulator.

Bad loans at Chinese banks may increase by 20 percent in 2009, BNP Paribas predicted in a Nov. 10 report.

Banks have ``shifted their strategy and mindset from bullish mode into a much more defensive mode,'' said Dorris Chen, a Shanghai-based analyst at BNP Paribas.

Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, told banks on Nov. 12 to better grade lending risks to different industries and to prevent bad loans from mounting.

``Governments in China and elsewhere are all trying to talk banks into lending money and it doesn't work,'' said Andy Xie, an independent Shanghai-based economist who was formerly Morgan Stanley's chief Asia economist. ``You cannot ask banks to lend to companies that are not viable.''

To contact the reporters for this story: Luo Jun in Shanghai at at jluo6@bloomberg.net; Li Yanping in Beijing at yli16@bloomberg.net