UPDATE 1-China's small firms face grim outlook -report

Mon Oct 10, 2011 11:20pm EDT

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* About 72 pct small firms expect no profits or losses -survey

* Bank loans to troubled small firms in Wenzhou total 1.6 bln yuan -media (Adds Guangzhou Daily report in last 4 paragraphs)

BEIJING Oct 11 (Reuters) - A growing number of small Chinese firms are in the red due to rising costs of raw materials and labour as well as weakening overseas demand, the Beijing Morning Post reported on Tuesday, citing a survey.

About 72 percent of companies with annual sales below 30 million yuan ($4.7 million) predicted they would post no profit or losses in the next six months, a survey conducted by Peking University and Chinese e-commerce giant Alibaba.com showed.

Some 3 percent of 3,000 firms in the Pearl River Delta said they expected to suffer huge losses or wind up their businesses, according to the survey.

Apart from domestic policy tightening, rising competition from countries such as India and Vietnam is also squeezing Chinese firms' profits, it said.

Factories are running at an average 71 percent of their capacity due to falling orders, it added.

A flurry of news about small business failures and fleeing debt-ridden factory owners in recent weeks has aroused concern among Chinese leaders.

During a visit to eastern Zhejiang province last week, Chinese Premier Wen Jiabao told banks to lend more to such firms and tolerate their high levels of bad debt, and demanded a crackdown on high-interest informal lending to cash-strapped private businesses.

His demand underscored the growing sensitivity of tight credit controls and Chinese banks' general preference to lend to bigger firms, especially state-owned ones.

Many small firms have been unable to borrow from banks amid a credit clampdown by Beijing, forcing some to turn to the underground lending market, which pools money from individuals and firms and lends it out at annual interest rates as high as 100 percent.

The high informal rates, more than 15 times China's benchmark lending rates, have pushed some firms beyond the limit, especially in Zhejiang's Wenzhou city, a hub of private enterprise.

Banking regulators in Wenzhou denied media reports that underground lending in the city was rampant at about 800 billion yuan, adding that banks will be little affected by recent business failures.

The Guangzhou Daily cited Zhang Yourong, head of the China Banking Regulatory Commission's local branch, as saying that 21 banks extended total loans of 1.6 billion yuan to the city's small firms that are experiencing difficulties with cash flow.

Even if all that went bad, non-performing loans in Wenzhou would only amount to 3.9 billion yuan, about 0.6 percent of the city's current outstanding loans, Zhang added.

He also denied an earlier media report that the city was applying 60 billion yuan in one-year bailout loans from the central bank. ($1 = 6.349 yuan) (Reporting by Langi Chiang and Kevin Yao; Editing by Jacqueline Wong)

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