China's campaign to boost loans to small firms was supposed to support the economy during its biggest slowdown in decades, but banks' reluctance to lend has left exporters and manufacturers in its southern industrial belt struggling to pay the bills.
Despite prodding from Beijing, several bankers have told Reuters they have little appetite to lend to smaller companies due to the uncertain economic outlook, the U.S.-China trade war and a years-long drive to purge risks from the financial system.
That has chilled credit flows to private sector firms, undermining stimulus measures that were designed to cushion the impact of slowing demand.
In the southern city of Dongguan in Guangdong province, one of the country's major manufacturing hubs, some small firms are moving production overseas in the face of operational and financing challenges.
"These days the most discussed topic — something that we always talk about in meetings — is whether we should move to Vietnam. Many of my clients have moved there," Li Jiajun, the chief financial officer at Guangdong LiShun Yuan Intelligent Automation, told Reuters.
LiShun, which makes paper box packaging machinery, lost financing from two of its four banks in the second quarter, halving its total credit line to 10 million yuan ($1.5 million).
One of those two banks — both are mid-sized — blamed its tighter lending policy on the first half's economic climate, while the other said its local branch was banned from approving new loans due to a spike in bad debts, he said.
As a result, the company, which expects to generate 250 million yuan in revenue this year, is delaying orders worth nearly 20 million yuan following the cut and taking "defensive measures" — slashing its payroll by 40% and selling equity to raise funds.
"Government policy and implementation on the ground are still somehow disconnected. It's not so easy — at least, I haven't enjoyed much benefits so far," Li said of China's efforts to boost lending.
In China, the state sector has long absorbed the lion's share of corporate lending from an industry dominated by government-controlled banks, forcing smaller borrowers across the country to rely on non-bank "shadow" lenders, which have been squeezed in the crackdown on financial risk.
"We are better than we used to be, but far from serving so many small companies in need," Bao Jiehan, vice president of the Dongguan branch of China Construction Bank, the country's second-largest lender, told Reuters.
Only 26% of China's tax-paying businesses have bank loans, leaving "plenty of room" for banks to lend, a banking regulatory official said.
Financing is especially tough for exporters who have been squeezed by the trade war, as banks tighten scrutiny and impose stricter risk controls, bankers and companies said.
Chen Xiuxia, chairwoman of Guangzhou-based Choice International, said lenders have gradually halved its credit line to 30 million yuan since President Xi Jinping's 2017 call for banks to curb financial risks.
Her efforts to secure more lending have not succeeded so far, with banks demanding heavy collateral and many non-bank lenders shut down.
"De-leveraging is aimed at the financial system but businesses like us are hit as a knock-on effect," said Chen, whose company exports goods like air conditioners and cars to Africa and expects to generate $100 million in revenue this year.
Luo Zhiquan, chairman of Dongguan Gowin Import & Export, is trying to obtain a 5 million yuan loan using an office building as collateral to add to his 10 million yuan credit line. His bank will only lend 50% of the property's value.
That was due to strict bank risk control over wobbling exporters amid the U.S.-China trade war. Gowin, which trades for 200 local manufacturers, saw its annual order value drop by 10 percent this year due to a 50 percent plunge in exports by his clients to U.S. buyers.
"Some banks just do not want to do business with trading companies anymore," said Luo, recalling what a Dongguan-based rural commercial bank told him when stopping his credit line.
Chinese policymakers are calling on the Big Five state banks to be "lead geese in the flock" in the push to boost lending.
Outstanding bank loans issued to small firms rose 21% on-year to 10.3 trillion yuan at end-May, driven mostly by the Big Five, which have extended more credit at cheaper rates.
In April, China's State Council set a target requiring the Big Five to increase such loans by 30% this year and cut their rates by 1 percentage point.
In Guangdong, CCB said it has hiked small business lending by 45% to 97.1 billion yuan in the first half of 2019.
Its main strategy is to increase the numbers of borrowers while reducing the average loan per company to rein in risk, bankers said. The average amount is 630,000 yuan for the bank's 140,000 small business loan borrowers in Guangdong, said Liu Lele, vice head of small business lending at CCB Guangdong.
In the past, most small business loans averaged 10-20 million yuan per borrower, said Bao of CCB Dongguan.
Small business loans are priced at 5.3% on average, from 6% last year, said Liu, following the government's April mandate requiring the Big Five to cut small firms' financing costs.
Overall the Big Five's lending to small business rose 23.7% in the first five months, while their average interest rate decreased by 0.65 percentage point to 4.79%.
"We are trying to break even. Profit is very thin, definitely less than 1%," said Liu, who hopes to adopt a more market-oriented approach to pricing loans in the future.
Although analysts see risks to banks' profitability and asset quality from the government's lending drive, state bankers say this is not an immediate concern for big banks and regulators who have set a higher tolerance for small firms' bad loans.
Some smaller-sized banks, however, are more conservative in their lending.
"We are still going through de-leveraging and structural changes of the economy," said a senior executive at a lender based in northern China that is active in Dongguan.
"In an economic downturn, banks' risk appetite is low."
At the same time, some small companies' appetite to borrow has diminished as economic prospects dim.
Guangdong Songqing Intelligent Technology, an industrial robotics maker, has cut this year's sales target as clients delay purchase orders in a wait-and-see approach, chairman Xiao Yongxiang told Reuters. Last year, the company closed its low-end mechanical arm business as demand shrank.
Xiao said he wants to raise 20 million yuan by selling equity to pay back half of his bank loans and ease the pressure from 120,000 yuan in monthly interest repayments.
Several bankers across China told Reuters that loan demand from qualified borrowers has weakened this year.
"Clients tell me labor costs and rent are high, trade frictions are hurting exports, their profits are getting thinner and thinner, and it's just getting harder and harder to do business," said Sun Shanming, vice general manager of the small business lending department of CCB's Guangzhou branch.