Finance crunch squeezes Chinese producers

Published on
April 3, 2012

Calls to seafood processors and fish farms in China tend to reveal rising labor costs and access to credit as the two key concerns.

Gradual finance reforms targeted at China’s small- and medium-sized enterprises (SMEs) may offer some hope to the largely privately owned seafood sector in 2012, as the government shows no sign of letting up on a credit-tightening drive aimed at real estate and certain state-dominated industrial sectors. A lack of credit is one of the concerns listed by the China Aquaculture Products Promotion and Marketing Association (CAPPMA) at its 2011 annual meeting.

A pilot program to begin this month to privatize finance to business sector suggests China is allowing private lenders and microfinance schemes to operate as an alternative to the state-controlled banking sector, which continues to focus lending on the state sector. Confined for now to the famously entrepreneurial southeast coastal city of Wenzhou, the pilot allows registered private lenders to operate loan companies targeting small- and medium-sized enterprises.

These measures will be welcome by smaller businesses often overlooked by state-owned banks. While credit-tightening measures are typically targeted at real estate, government has promised to keep manufacturing- and service-related SMEs afloat. The Wenzhou experiment is the latest central government measure targeted at private, smaller firms that will get RMB 3 billion (USD 475.6 million) annually in central government support for the next five years, according to a Ministry of Industry and Information Technology scheme announced in February.

China’s seafood businesses, which remain overwhelmingly privately owned, will welcome new finance channels. Among them is Nichilan Foods Co., which has been trying to shift its focus to the domestic market, from exporting 80 percent of its output. Reached by phone, Miss Lin in the company service department said the firm, which ships 1,000 metric tons of seafood a year, wants to sell more of its catfish, flaked eel and breaded shrimp to the domestic market. “But that requires major investment in our distribution and wholesale networks … which will take time to secure,” she said.

Larger firms have managed to get onto China’s stock exchanges, but poor performing exchanges makes that a less-than-perfect option in China where 80 percent of stock market investors lost money in 2011. Based in Guangdong province, Zhanjiang Guolian Aquatic Provinces ships 40 percent of its shrimp to the United States. The firm is listed on the Shenzhen exchange.

Government efforts on financial reform have been given a new sense of urgency by recent trade figures. China’s trade deficit slipped to a 22-year high in February. In 2011, industries’ export shipments had increased by just 16.6 percent last year, slower than in previous years.

There are many reasons for concern among smaller firms, which account for the bulk of job creation and exports in China, whose economy remains dominated by state-controlled firms. Rising labor costs and soft Western export markets has hurt export-driven SMEs. Lending from Chinese banks in February was down to RMB 710 billion versus the RMB 750 billion expected.

SMEs pay up to 70 percent interest on loans from informal lenders, who have been found to get cash from state-owned enterprises keen to profit from the practice by exploiting their own access to credit from state banks. Underground or shadow banks accounted for 19 percent of lending in 2011, according to Swiss-based bank UBS, which estimates informal lending in China stands somewhere between USD 316 and USD 632 billion. The issue has been thrown into stark relief by the death sentence given to Wu Ying, the operator of one such private lending agency. Wu Ying paid 80 percent to third parties supplying her cash to lend out. However, she was unable to repay those lenders when government credit tightening and an export slump caused defaults by some of the businesses and real estate developers borrowing from Wu.

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