China's SMEs face a bumpy ride

MR DONG Yitao, a manager at a Beijing-based furniture-maker, is becoming more alarmed by the day with new orders drying up over the past month.

"Sales have been slowing this year, but the past month was particularly worrying. Our big sale in May got 50 per cent less revenue than last year," said Mr Dong, 37.

His company, with a staff of 400, is one of a mass of small and medium-sized enterprises (SMEs) in China's vast manufacturing sector suffering a sharp deceleration of late. Factory activity in June slumped to a nine-month low, a preliminary survey that tracks mainly SMEs showed yesterday.

This has deepened fears that the world's No.2 economy is headed for another downturn.

It could even miss its official 7.5 per cent gross domestic product (GDP) growth target for this year, with analysts at Barclays and HSBC cutting their forecasts for China's 2013 performance to 7.4 per cent.

Earlier this year, hopes were high that China was consolidating its recovery from last year's slowdown, which dragged down 2012's GDP growth to 7.8 per cent - the lowest level in 13 years.

But yesterday's flash HSBC Purchasing Managers' Index (PMI) reading suggested that manufacturers - particularly SMEs, who form the backbone of the economy and hire some 80 per cent of the workforce - are struggling more than before. They not only face a decline in external orders, but also faltering domestic demand - which China is relying on as a key growth driver this year.

The PMI fell to 48.3 in June from May's 49.2, falling further below the 50-point level separating expansion and contraction.

It was "weighed down by deteriorating external demand, moderating domestic demand and rising de-stocking pressures," said HSBC economist Qu Hongbin.

The slump in manufacturing could continue for a few more months amid weak demand, warned Central University of Finance and Economics professor Guo Tianyong.

But he dismissed fears of a hard landing. "China's slowdown is partly caused by Beijing's focus on reforms to structure the economy away from exports to higher value-added activities. This will reap higher growth later on." But SMEs will suffer short-term pain.

China's new top leaders "have more patience and a higher tolerance for lower growth levels", so they will not settle for short-term stimulus that gives a boost to data but exacerbates imbalances in the economy, added Prof Guo.

The June PMI survey and data tracking the broader economy "suggest that growth has slowed to the rate of one year ago", wrote Capital Economics analysts Mark Williams and Wang Qinwei in a note yesterday. At the time, policymakers boosted credit to support growth. They cut interest rates and the required reserves ratio - the level of reserves banks must hold that determines how much they can lend.

But this time, Beijing is unlikely to stimulate the economy in a similar way. After all, China's credit is already growing at 22 per cent currently, compared to 16 per cent a year ago. So there is less need for looser monetary policies such as cutting interest rates.

Mr Dong, too, does not expect any government support and is bracing himself for a bumpy ride. "I don't have much confidence for business in the second half of this year," he said.

graceng@sph.com.sg

Additional reporting by Lina Miao

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