SMEs gloomy over business prospects

A growing number of small and medium-sized enterprises are pessimistic about their business prospects for next year, with their confidence hit by high taxes and soaring costs, a new survey showed.

The annual business climate survey - conducted by leading China-based Internet company NetEase Inc - indicated that financing difficulties weren't a major issue this year as more SMEs reported sufficient cash flow.

But analysts believe the improved situation is mainly a result of the shrinking production caused by lackluster global demand, which prompted fewer firms to ask for loans.

The annual survey drew opinions from top executives of a hundred SMEs nationwide covering sectors such as textiles, machinery, food and the Internet.

Forty-two percent of the surveyed firms forecast a continuation of the financial crisis, a drop of 8 percent compared with last year. But another 40 percent were "unsure" about their business prospects, compared with just 27 percent a year ago.

One-third of the SMEs showed faltering confidence in the macro economic outlook for 2013, four points higher than last year. Half of the companies are as optimistic as they were last year.

Only 40 percent said they expect improved business performances in 2012, while the figure was 51 percent last year.

However, there's still an increasing commitment to growth plans. Instead of scaling back investment, 62 percent of companies plan to boost capital and equipment levels, up 5 percent from last year. And more than half of the companies vowed to expand their employee numbers, slightly higher than last year.

But Wang Zhendong, the owner of a coffee business consultancy in Shanghai, has some doubts about the results. His family runs a plastic modules plant and is struggling to sustain growth due to the lackluster economy and intense competition.

"We were able to raise our production capability last year. But due to a demand shortage this year, many home appliance makers turned to recycled plastic, which severely increased competition and eroded our profits," he said.

The family-run plant generated annual revenue of 30 million yuan ($4.7 million), but the margin was a mere 1.5 million yuan. In contrast, his consultancy was able to post a profit of 1.5 million yuan from annual revenue of just 3 million yuan.

"We're definitely not going to put new resources into the plant. And we might consider selling it in a year or two," he said.

This year, SMEs are having an easier time securing loans from banks compared with last year, highlighting increased market fluidity. More than one-third of the surveyed firms now believe that getting loans is "normal", doubling the percentage from the previous year.

High taxation surfaced as the top concern in this year's survey.

About a quarter of the companies said that they feel burdened with unaffordable taxes, citing it as their biggest headache.

Meanwhile, rising costs are worrying at least 19 percent of business owners, while loan barriers ranked as the third-biggest hurdle. However, easier access to loans is a "false proposition" because there are simply less companies trying to get loans, according to Dai Jie, head of the international cooperation office of the Shanghai Small Enterprises Center.

"Most SMEs are being squeezed by rising costs and shrinking demand. Why would they bother getting loans?" Dai asked.

A separate poll done by Dai's organization showed a different picture. A majority of the 700 member companies reported "pessimism" or said they were "highly cautious" about their business prospects next year.

To boost the development of SMEs, has China opened a new channel of financing by launching long-awaited high-yield bonds that aim to deal with the capital starvation of small-business owners.

However, it is still quite difficult to get loans because Chinese banks largely evaluate collateral based on hard assets rather than projected cash flow, putting typically asset-light SMEs at a disadvantage, Wang said.

"It's also hard because banks extend loans to individual owners, whereas most companies have several shareholders. So how do they leverage the risk, should a default occur? It's out of the question," Wang added.

Renewed pressure from taxation is also a "natural outcome" of the squeezed margins, Dai noted, as taxation policies have not changed much.

"It remains to be seen whether the ongoing value-added tax reform will prove to be a relief for smaller players," Dai said.