URGENT CURE NEEDED
Small businesses in China fear fatal consequences from coronavirus, with 85% expecting to run out of cash within three months. By Nikki Sun in Hong Kong
When Danny Lau reopened his aluminium facade panel factory in the southern city of Dongguan in mid-February, after an extended Lunar New Year break, less than a third of its roughly 200 migrant workers showed up.
“They couldn’t make their way back,” the Hong Kong businessman said. Most of his workers hail from central-western China, including 11 from Hubei province, the centre of the coronavirus outbreak that has killed more than 4,000 people worldwide. Many said they had been banned from leaving their communities as authorities raced to contain the epidemic.
Lau’s business had already been hurt by the 25% tariff on aluminium products the United States imposed in its tit-fortat trade war with China. Now he worries the production constraints will give American customers another reason to cancel orders and switch to Southeast Asian suppliers.
The virus is making a bad situation “worse”, he said.
This same double blow is hitting small and medium enterprises across China, prompting a growing chorus of calls for the government to step in and offer lifelines. The stakes could not be higher: These smaller employers account for 99.8% of registered companies in China and employ 79.4% of workers. They contribute more than 60% of gross domestic product and more than 50% of tax revenue.
Companies like Lau’s that have resumed some production are the lucky ones. Many factories and other businesses remained completely stalled due to the virus. Some owners can do little but pray that things return to normal before they fall off a financial cliff.
Eighty-five percent of 1,506 SMEs surveyed in early February expect to run out of cash within three months, according to a report by Tsinghua University and Peking University. One-third of the respondents said the outbreak is likely to cut into their full-year revenue by more than 50%.
“Most SMEs in China rely on operating revenue and they have fewer sources for funding” than large companies and state-owned enterprises, said Zhu Wuxiang, a professor at the Tsinghua University School of Economics and Management.
Employers need to pay landlords, workers, suppliers and creditors — regardless of whether they can regain full production capacity.
“The longer the epidemic lasts, the larger the cash gap drain will be,” Zhu said, adding that companies affected by the trade war face a greater danger of bankruptcy because many are already heavily indebted. “Self-rescue will not be enough. The government will need to lend help.”
While Chinese authorities were saying last week that work was resuming at most businesses, there are wide variations by region and sector. Over 90% of businesses in the key southern province of Guangdong had resumed work as of March 3, state media said.
While 60% of logistics companies across the country were open, according to the government, an analysis by the brokerage Nomura suggested that just 44% of businesses in sectors directly affected by the outbreak were up and running as of March 1.
Lu Ting, the chief China economist for Nomura, suggested local governments around the country face a daunting question of whether to focus on staving off the virus or encourage factory reopenings.
As long as the national logistics network “is still in shambles”, he said, there might be little to gain from rushing restarts, whereas “the cost of a rebound in infections might be quite high”. He expects economic activity to pick up again in a couple of months.
In the meantime, factory owner Richard Leung has found that switching production lines back on does not mean that they stay on. His plant in a village near Shenzhen makes women’s bags for export. After reopening in mid-February, he was forced to shut down again two days later. “The town government informed us that two [virus] cases were confirmed in a nearby town,” he said. “They said it’s not appropriate for our workers to come in and out of the area.”
Leung suspended operations for five more days, and was covering the cost of accommodations and meals for about 100 workers who had already come back to the factory.
The 57-year-old said the impact of the coronavirus crisis was much worse than the Sars outbreak in 2002 and 2003. Back then, his production continued uninterrupted, despite the need for special health checks. This time he expects the production delays will cost his company 30-40% of its annual revenue.
“The government needs to help us,” Leung said. “The costs are too high. We can’t afford it.”
Zhou Dewen, the chairman of the Small and Medium Business Development Association in the Wenzhou, agrees that this crisis is worse than Sars.
In fact, he said, it is “the most severe” of any crisis in the 40 years since China embarked on major economic reforms. He sees not a double but a “triple whammy”, factoring in the economic slowdown the country was experiencing even before the trade conflict and the virus.
Wenzhou, on the coast of Zhejiang province, was the first city outside Hubei put into full lockdown. The first factories allowed to resume work were makers of medical supplies, and that didn’t happen until mid-February.
“What entrepreneurs need is confidence,” Zhou said. “But first they need to survive.” He is hoping the government will offer fiscal support and tax breaks to buy more time for small businesses.
The central government in Beijing is proposing a number of measures including tax and fee reductions and exemptions, financial support, social security benefits and energy cost reductions. Some local governments have already responded by waiving electric bills and delaying taxes, social security payments and loans.
But for some businesses, such relief measures are little consolation.
One strategy for limiting the spread of the virus is to prohibit large gatherings.
In the eastern city of Hangzhou, the municipal government has essentially banned wedding banquets since mid-January. Wedding planner Zhu Yun had about 60 events lined up for February and March, but all of them had to be postponed.
“A tax reduction doesn’t help if you don’t even have income,” said Zhu, who must somehow scrape together around 700,000 yuan (US$100,000) for rent and the salaries of about 40 employees.
Zhu reckons her company will lose about 3 million yuan in profit over two months. Besides the postponements, couples that were looking at wedding options before the outbreak have put their planning on hold. There is little room, it seems, to think about love in the time of the coronavirus.
“This is the most difficult time I have ever experienced” after 11 years of running the company, Zhu said. The worst part might be the uncertainty: She has no idea when the authorities might lift the ban or whether she can make it that long.
“All of this is unknown to us,” Zhu said. While she aims to tough it out for now, others are steeling themselves to take drastic action.
“The first thing I would do after returning to work is to convince my employees to take a pay cut,” said Huang Zhou, who founded an educational institute in Guangzhou, in mid-February.
Her company, which offers afterschool courses, was struggling to maintain its payroll while regular schools were closed to fight the epidemic. Huang and her six colleagues tried to move their operations online but “it did not work out well”.
“Not all courses are suitable for e-learning,” she said, “and some teachers also did not feel comfortable about live-streaming”.
Huang said at the time that her cash flow was only enough to keep going for one more month. “I will have to cut my employees’ salaries by at least half. If they disagree, then I’ll be left with no choice but to fire them.”
Analysts are deeply concerned about the damage the virus may be about to do to nationwide employment. A looming wave of business failures threatens the lowest-skilled and poorest Chinese workers more than anyone.
Wang Dan, a Beijing-based analyst with the Economist Intelligence Unit, estimates the outbreak could cost China about 4.5 million jobs in 2020, of which 75% will be at SMEs. This translates to a roughly a one-percentage-point rise in the unemployment rate, largely on the lower end of the skill spectrum.
“A lot of small businesses that compete on price will be ousted,” Wang predicted, pointing to restaurants, retailers and entertainment facilities. The local property market and local government tax revenue could also be affected, she added.