SHANGHAI, Dec. 28 (Xinhua) -- Private Chinese firms are braced for another wave of funding difficulties as banks hoard cash to meet regulatory requirements at the end of the year.
At least 40 textile companies in east China' s Jiangsu and Zhejiang Provinces have disappeared in the past six months, most likely the result of failure to secure funding for their debts, an official with the China National Textile and Apparel Council told Xinhua in a recent interview.
The official added that another large textile firm went under earlier this month, leaving behind 600 million yuan in outstanding debt.
"Most of these textile firms ask each other to guarantee loan repayments. If one of them goes under, it will take everybody else down as well," said a textile business owner in Zhejiang.
With gross margin for most small and medium firms between three and five percent, funds in the banking system tend to chase higher returns, said Zhou Dewen, Chairman of the Wenzhou SME Development Association. This leaves small firms with no choice but to seek credit from informal lenders at higher interest rates. The rates charged by these lenders, some of which are exorbitant, make it almost impossible for firms to repay the loans.
The latest cash squeeze comes as the People's Bank of China (PBoC), the central bank, said the banking system has excess cash reserves of 1.5 trillion yuan.
Small and medium banks are the major lenders to private business, but they are not as competent in attracting household deposits as the large state lenders. Much of their funds come from interbank market, where banks lend to each other in the short term.
The sudden rise in the cost of interbank funds over the past week underscores the difficulties for banks at the end of the year.
It is small firms who suffer the collateral damage of the cash crunch.