Overshadowed by high-profile stories about China’s failing economy, Covid outbreaks and tensions over Taiwan, the country’s woes are having a devastating impact on small businesses and startups.
A wealth of recent data shows that tight credit, weak consumer demand, unemployment and other factors are weighing on firms most in need of financing.
In July, only 43.7% of small and medium-sized enterprises. [SMEs] among the 3,000 firms surveyed by the China Association of Small and Medium Enterprises, more than 75% were operating at full capacity. Therefore, half worked below 75%.
While huge state-owned corporations enjoy preferential lending and government treatment, smaller firms are the lifeblood of the Chinese economy.
According to the National Bureau of Statistics (NBS), as of the end of 2018, 99.8% of enterprises in China were SMEs, accounting for 80% of non-state employment.
Consumption also hurts sales. Consumer prices reached a two-year high in July, NBS reported on Wednesday. In addition, “persistent uncertainty from the pandemic and weak household incomes hit China’s consumer and producer confidence harder in 2022 than in the past two years,” S&P Global said in a recent note.
Li Wei, director of the Center for Economic Research at CKGSB, China’s leading MBA school, wrote in his recent Business Conditions Index report that the pandemic and falling incomes are the two big issues currently affecting consumption.
“Given that neither will change significantly, we do not have high expectations for future consumption. From this point of view, companies and people should be ready for deleveraging,” he said.
This was told by Wu Mingfeng, a 29-year-old programmer from Beijing Barron Friday: “Now is the time to save. We have no idea what will happen in a month or a year.”
These headwinds are compounded by the current series of Covid outbreaks in China, most of them in tourist or manufacturing areas.
For example, the city of Yiwu – near Shanghai – has long been considered the world’s largest small wholesale commodity market, from which it is shipped to almost every country. A sudden outbreak of Covid there caused the closure of non-essential services on Thursday and restrictions on movement, including shipments.
Arguably China’s most popular summer tourist destination, Hainan Island has been on lockdown since last week, barring residents and outsiders from leaving. Tibet, a favorite among the Chinese, reported its first case this week and has been partially locked down.
Existing smaller firms are not the only ones suffering. It is difficult for startups to find financing.
Chinese startup funding hit an eight-year low in the second quarter, according to a report by KPMG, due to challenging credit and investor scrutiny in the unappetizing current landscape.
A striking aspect of the decline in funding in China, which has halved from $18 billion last quarter to $9 billion now, was the sharp decline in funding compared to the rest of the world, which fell by just 27% in aggregate, the report said.
“Looking ahead, venture capital investment in China is expected to remain relatively weak in the third quarter of 2022, given the ongoing Covid-19 situation and the uncertain geopolitical and macroeconomic environment. Fundraising activity in China’s venture capital market is also expected to remain subdued,” Egidio Zarella, partner at KPMG China, said in a recent note.
Unemployment issues are not helping. Nearly one in five young Chinese — ages 16 to 24 — can’t find work, even though they’re usually the driving force behind startups.
Even venture capital funding stopped on a large scale in the second quarter.
There were 23 mega deals totaling nearly $5.1 billion, representing a 34.3% decrease in volume and a 20% drop in value compared to the previous quarter. It was the third consecutive quarter of declines for such deals, according to a report by Deal Street Asia Data Vantage released on Thursday.
The average large deal size was down 42.7% from the first quarter, with smaller deal sizes also down, but more modestly.