Nov. 28 (Bloomberg) -- China’s small businesses face a tough winter, helped “only a little” by the government’s $586 billion stimulus package, said Li Zibin, chairman of the China Association of Small and Medium Enterprises.

“More small and medium-sized companies will shut down as the economy slows further,” Li said in an interview yesterday in Beijing. Businesses face a “funding drought,” he said.

China’s small and medium-sized businesses account for over 60 percent of gross domestic product and 75 percent of urban jobs, the government says. Waning export demand and a slowing economy are triggering bankruptcies and protests at job losses, raising the risk of social unrest in the world’s most populous nation.

The government announced on Nov. 9 a package of measures through 2010 to stimulate growth, including spending on housing and infrastructure. It reiterated that it wanted banks to boost lending to smaller businesses.

While the plan will help smaller businesses by boosting domestic demand, it’s not certain that efforts to encourage lending will succeed, Li said. Companies are still being hurt by the lagged effect of government measures last year to tighten lending to counter inflation, he added.

Banks may prefer to lend to “risk-free infrastructure projects” rather than small companies, UBS AG economist Wang Tao said this month.

The worst global financial crisis since the Great Depression has cut demand for China’s products and a slump in construction is also a drag on the economy.

‘Tough Winter’

Small companies face a “tough winter,” said Li, whose organization claimed 76,000 members in the first half of this year. Two-thirds of China’s small toy makers closed in the first nine months, according to customs data.

Gross domestic product expanded at the weakest pace in five years in the third quarter and the slowdown is deepening, according to the government, which yesterday cited worsening economic indicators for this month.

The central bank cut interest rates by the most in 11 years this week to prop up growth, while the World Bank slashed its forecast for the nation’s economic expansion next year to 7.5 percent from 9.2 percent.

The government’s efforts to help smaller businesses have included cutting export-tax rebates and doubling the size of an assistance fund to 5.1 billion yuan ($750 million). It has also eliminated banks’ lending quotas.

Li’s association plans a 3 billion yuan fund, including money from the nation’s social security fund and China Development Bank, to help “promising” companies survive the financial crisis.

He wouldn’t estimate the number of small businesses facing bankruptcy.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net

Last Updated: November 28, 2008 01:15 EST