The government of Dongguan passed a 1 billion yuan (US$147 million) fund on Monday to ease the financial difficulties of small and medium-sized enterprises (SMEs) and processing companies.

This new relief comes on the heels of a 1 billion yuan fund set up in August to help processing companies reposition themselves.

"It is an urgent task for the government to support enterprises at a time of depression. When they overcome their difficulties, they will be able to repay the government through taxes," Liu Zhigeng, Party secretary of Dongguan, said.

Affected by shrinking global market demand and increasing prices for raw materials, SMEs and processing companies in Dongguan, like their counterparts in other coastal export-oriented cities in the country, have been hard hit since the beginning of this year, with some even having to close down.

According to a survey by the economic and trade authority of Dongguan, a lack of funds is the biggest problem facing SMEs and processing companies.

Some 74 percent of the 1,500 companies surveyed said they were in need of funds.

The city's financial bureau is working on loan details for the companies.

According to the preliminary regulations, qualified applicants must meet three requirements: for SMEs, their annual sales should be no more than 300 million yuan, but there is no limit set for processing companies; they should have no record of bad credit; and they should register with the industrial and commerce department of Dongguan, accompanied by a legal representative.

Market analysts said the government could use the new fund in two ways: It could offer a discounted interest rate to companies seeking loans or it could offer risk compensation guarantees to banks offering loans, Southern Metropolis Daily said yesterday.

"It's good the government is trying to help these companies, but 1 billion yuan is a very limited amount and does not solve the root of the problem of SMEs in Dongguan," Zhang Jiansen, a senior researcher with the China Development Institute, said.

Even with the government offering banks a guarantee it might not offset their considerations as it involves high risks and high operational costs, Zhang said.

"I would rather suggest the government set up a credibility database of SMEs and a mutual guarantee between them and the government concerning repayment of loans. It could benefit all in the long run," Zhang said.

(China Daily October 8, 2008)