China Chamber Warns Beijing of Mass Bankruptcies

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Jul. 22 – The All China Federation of Industry and Commerce, the official chamber for non-state-owned enterprises in China, has urged the central government to take action concerning what it regards as a serious likelihood of major bankruptcies among small to medium-sized businesses in China.

In a strongly worded warning, the chamber said that 7.5 million Chinese businesses were in danger of going out of business as a result of credit tightening policies and increasing labor costs. The situation was described as “worse” than when the financial crisis began. The Chamber prepared its message following a three month study of the business environment in China. The ACFIC Chairman, Huang Mengfu, has reportedly stated that the report has been passed to senior leaders, including Premier Wen Jiabao.

Privately-owned businesses in China make up some 80 percent of the country’s total employment and 50 percent of GDP. Although businesses in Guangdong Province have been hit hard by policies designed to deter low-end manufacturing processes, the trend is spreading throughout China. In Zhejiang Province, south of Shanghai, the China People’s Daily reported that some 7,300 businesses closed in the period January-April this year. Beijing’s efforts to stamp out inflation and curb rising property prices have resulted in a tightening of credit policy, making it difficult for businesses to obtain loans. This has affected businesses with legitimate overseas orders, as they found themselves unable to obtain financing for verifiable production.

Likely measures to be taken – probably to be introduced in October – include tax cuts, government subsidies, and ordering banks to make loans to businesses who can provide documentary proof of legitimate production financing requirements. However, it is unlikely that such measures will include foreign-invested entities in China, despite the Chinese government officially classifying them as Chinese companies. In the past, assistance has been reserved for domestic businesses only unless the FIE can demonstrate possession of fixed assets in the country.

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