Chinese SMEs struggle with tight financing

"Using high returns to lure money from the public is like an economic opiate. Entrepreneurs are often tempted to take a dose to avoid breaking their capital chains," said Liu, the auto parts company owner."It is impossible to quit once you start borrowing like this, and the financial conditions often get worse."

Chinese decision-makers have been trying to tackle the financing difficulty that has burdened China's real economy for years.

In last week's south China tour, Chinese Premier Li Keqiang visited Guangdong's Qianhai Webank, which has low costs compared to traditional banks and focuses on small loans to individuals and small firms.

The phrase "tackle financing difficulty" was mentioned eight times at State Council executive meetings held in 2014, showing the government's desire to ease funding conditions for SMEs.

On December 22, 2014, the People's Bank of China announced it would lower the country's benchmark lending interest rates by 0.4 percent, the largest drop since 2008.

"The real estate and stock markets are the first to enjoy the advantages when the interest rate is reduced. It is also good news for the real economy in China," Liu said.

However, authorities need to roll out more reforms to lower SMEs' borrowing costs, said Yuan Gangming, a researcher at the Institute of China and World Economy at Tsinghua University.

Yuan said the fundamental cause of SMEs' financing difficulty lies in imbalanced distribution of financial resources between large corporations and SMEs. To solve this problem, China might pull funding from some massive projects and reallocate the loans to SMEs that need them.

He urged banks to cancel unnecessary charges and simplify the loan approval process for SMEs.

Professor Liu, meanwhile, suggested that liberalization of interest rates would be an effective measure, and authorities could foster more financing channels such as Internet finance.