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China Credit Squeeze Leads to Surging Rates for Small Companies

Smaller privately owned companies in China’s Zhejiang province are paying almost five times the central bank’s benchmark borrowing rate on loans from non-banking institutions, a local government report said.

The companies are paying interest rates of 25 percent to 30 percent a year on such loans, according to a report from the Zhejiang bureau for small and medium-sized enterprises posted on its website June 15. The People’s Bank of China’s benchmark one-year lending rate, which has been raised four times since September to help curb inflation, is currently 6.31 percent.

China’s campaign to rein in consumer prices, which climbed last month at the fastest pace in almost three years, has made it harder for smaller companies to fund their businesses. In addition to raising interest rates, the PBOC has ordered commercial banks to keep more of their deposits at the central bank, curbing the amount they can lend. The credit squeeze has forced many companies to borrow outside the official banking system and may bankrupt smaller businesses.

“A slight change in the wind can lead to these companies not being able to survive,” said Zhou Dewen, head of the small and medium-sized enterprises association in Wenzhou, a coastal city in Zhejiang province. “Most small and medium-sized enterprises here make products like cigarette lighters, apparel and footwear. Their gross margins are as low as one percent.”

Banks in Zhejiang have also raised the interest rates they charge on loans to smaller businesses by as much as 30 percent, according to the provincial bureau.

First-quarter exports by the province’s small and medium-sized businesses fell 5.3 percent from a year earlier to 178 billion yuan ($27.5 billion), according to the report. China’s total exports in the first quarter climbed 26.5 percent.

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