SMEs on their way to full recovery in Q2

China's small and medium-sized enterprises are recovering slowly, according to Standard Chartered, with a full recovery expected in the second quarter.

The bank's monthly SME survey showed that their business activities have yet to return to normal, with its headline SME index rising to 49.6 for March after plummeting to 40.5 in February.

The “current performance” reading remained in contractionary territory at 46.2, compared with a record low of 31.3 last month, "suggesting a relatively slow pace of recovery," according to Standard Chartered.

Nevertheless, the “expectations” reading at 54.0 compared with the previous 45.8 indicated better near-term prospects.

The manufacturing industry gained pace this month and resumed expansion, while all other industries continued to contract. The services and technology sectors performed slightly better than wholesale and retail and other industries including real estate, logistics, construction and food processing.

Interrupted operations due to virus containment measures continued to have a negative impact. Sales remained weak, with current orders at around 53 percent of normal levels, a slight rebound from February’s 46 percent. Capacity utilization also rose to 52 percent from 42 percent in February.

A shortage of labor is no longer a key obstacle to resuming production. The current performance reading of “employment” rose to 47.8 this month, up from 34.6 in February, while the expected reading of “employment” also picked up.

The high cost of preventing a resurgence of the pandemic and sluggish demand, however, was key constraints to resuming production. In spite of that, "production and sales are expected to resume expansion in the second quarter," said Shen Lan, China economist at the bank.

"Without a significant price hike, our surveyed SMEs project a 12 percent decline in their revenue for the first quarter, narrowed from the 43 percent drop anticipated last month," Shen said.

In terms of financing, banks continued to ramp up lending to SMEs. The “bank credit access” reading climbed 2.2 percentage points to a record high of 67.6 in March, "suggesting the fastest-ever pace of credit placement to SMEs." However, sub-50 readings for financing costs of banks and non-bank financial institutions indicate no easing in interest rates charged to SMEs this month, according to the report.

The central bank and banking regulators have continued to enhance credit support to SMEs and reduce comprehensive financing costs. Policy banks also increased 350 billion yuan of special credit lines to SMEs at preferential interest rates. 

"We believe banks’ lending to SMEs will stay strong near-term on policy calls to benefit more companies facing stressful financial conditions," Shen said. 

The targeted required reserve ratio cut for inclusive financing released 550 billion of long-term funding in March, which was required to be used to issue loans to SMEs at significantly lower interest rates.