China Stimulus Boosts State Firms, Skips Entrepreneurs

 

Surviving the slump is a lonely struggle for the small, private businesses that once drove China’s boom.

In the eastern city of Wujiang, the neighborhood of bathrobe-maker Jujie Microfibers Apparel Fabrics Co. is emptying out as falling sales force factories to close. Though state banks have been in a lending frenzy to boot up the economy, the loans are going to state industries, not Jujie and other private companies.

“We haven’t gotten any help from the government. It’s all by our own efforts,” said May Yang, manager of the 400-employee company.

Private companies that drove China’s growth, creating jobs and boosting incomes, are getting short shrift in a massive government stimulus program that’s favoring state enterprises. The response so far is leaving private entrepreneurs behind and could end up reshaping industries by building up state firms at the expense of private competitors.

“My suspicion is that the stimulus will basically benefit the state sector at the expense of the private sector,” said Arthur Kroeber, managing director of Dragonomics, an economic research firm in Beijing.

China’s 4 trillion yuan ($586 billion) stimulus is heavily geared toward building highways and other public works. That has boosted revenues for construction companies, most of them state-owned, and private suppliers of cement and tools. But little has flowed to the rest of the private sector.

“We haven’t seen any of the 4 trillion yuan — not even 400 yuan,” said Hu Juntang, general manager of the Linxing Timber Co., a furniture maker with 150 employees in the eastern coastal city of Yantai.

There are no comprehensive data on how many private companies or jobs have been lost to the crisis. The China Daily newspaper said Guangdong province, the epicenter of export industries and the hardest hit by shrinking global demand, lost 30 percent of its 3,900 toy factories last year. As many as 30 million migrants were thrown out of work as factories closed, according to a Cabinet official quoted by Chinese media last month.

Economists say the worst of China’s slump might be past after stimulus spending helped to boost factory output and investment in March. But that masks enduring problems for private companies that are getting little of that money.

China’s first-quarter economic growth of 6.1 percent was the strongest rate of any major country. However, according to Rock Jin, chief economist for Sinolink Securities Co. in Beijing, 2.4 percentage points of that came from stimulus spending. “The decline of regular economic growth is continuing,” Jin said.

The slump is aggravating the uphill struggle that entrepreneurs have faced throughout China’s three decades of market-style reforms.

Privately owned factories that compete in global markets to supply toys, furniture and other goods are often the most dynamic, efficient part of China’s economy. China’s elite state industries — banks, phone companies, airlines and others — are sheltered by regulatory barriers against potential foreign and private rivals. Lower-level officials favor companies owned by their local or provincial governments. Banks are reluctant to deal with private borrowers that lack government backing.

Chinese bank lending surged to a monthly record of 1.9 trillion yuan ($277 billion) in March as they pumped out money for stimulus projects, the central bank reported. Only 13 percent of that went to private companies, according to a report by Xia Xiaolin, a researcher for a Cabinet think tank, in the newspaper China Business Times. By comparison, economists at the World Bank and global investment firms say the non-state sector produces as much as two-thirds of China’s economic output and creates the majority of its new jobs.

China’s bank regulator said in February that lenders were ordered to help small companies survive, but it is unclear what they have done.

“All companies are facing financing problems, but banks don’t care,” said Hu, the furniture factory manager. “No matter what the country calls for, local bank managers for sure will not change the conditions under which they will lend or not.”

Sales at Hu’s factory fell 40 percent last year from 2007, with no improvement in sight, he said. His loan applications were rejected because the factory doesn’t own its building or other assets that can be seized if it defaults. He said he finally got a small loan after other companies put up collateral for him.

Yang said Jujie, the textile company, had trouble getting loans, despite assets of 100 million yuan ($14.6 million), but finally received 50 million yuan ($7.3 million).

“Small companies have closed down around us and several big companies went bankrupt due to problems getting capital,” she said.

Jujie’s first-quarter sales were down 25 percent from the same time last year and it no longer produces without a firm order in hand, Yang said.

“We are switching to the domestic market, but bathrobes are not very popular in China, so we have not seen any effect so far,” she said.

Meanwhile, state-owned companies already are starting to rebound due to stimulus spending. Total profit in March for the 138 companies owned by the central government climbed 86 percent from February to 62.3 billion yuan ($9 billion), according to the State-owned Assets Supervision and Administration Commission.

The American Chamber of Commerce in China, in a report this month, warned that the policy could squeeze foreign and private competitors out of areas including steel, aviation, shipping and power generation.

The worst still might lie ahead for entrepreneurs, who could see a rise in bankruptcies as owners decide business will not recover, said Mark Fairbairn, a bankruptcy specialist for the law firm O’Melveny & Myers in Hong Kong.

Problem areas include real estate, where developers are struggling with a glut of unsold properties, and manufacturers of shoes, electronics and other goods that could see thin profit margins wiped out by rising costs even if sales revive, he said.

“Companies kind of put their head in the sand for a period and hope they will get away,” Fairbairn said. “I think in a few more months, there will be a spike in insolvency cases.”

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Associated Press researcher Bonnie Cao in Beijing contributed to this report.

5/13/2009 2:25 AM JOE McDONALD AP Business Writer BEIJING