Beijing: A credit squeeze caused by the Chinese government's fiscal tightening measures to stabilize inflation is having a negative effect on the country's small and medium-size enterprises, the mainstay of exports, driving many of them into the red.

Chinese officials deny reports of a wave of bankruptcies, but acknowledge that SMEs, which account for over 90 per cent of the exports from the private sector, are facing difficulties due to the credit squeeze pushing up manufacturing costs.

China's Ministry of Industry and Information Technology acknowledged that SMEs face serious financing difficulties after the government tightened liquidity, but rejected claims of a wave of SME bankruptcies.

"Based on our studies, the reported mass bankruptcy of SMEs in some provinces along the East Coast was not true," Zhu Hongren, chief engineer and spokesman for the ministry, told state-run agency.

However, the tightened credit policy, soaring raw material prices and rising labour costs do make lives for SMEs more difficult and relevant departments and local governments need to actively help these companies for the sake of social stability, Zhu said.

In June, the People's Bank of China raised the reserve ratio requirement by half a percentage point, forcing big banks to put aside 21.5 per cent of their deposits, a record high, and locking up funds that could otherwise be loaned out, thus fuelling inflation.

A recent study by the Economic and Trade Commission of Wenzhou, Zhejiang Province, showed that only 57.4 per cent of SMEs are seeing their financing demands met and more than 42.9 per cent are under financial pressure.

About 88 per cent of SMEs in Shenzhen are under financial strain and 57 per cent are encountering financing difficulties, the Southern Metropolis Daily reported on Thursday, citing local government data.

"While further tightening liquidity, the government should also adopt a more flexible credit policy for SMEs, especially for those companies with good sustainability and prospects," Zhang Wenkui, deputy director of the Enterprise Research Institute under the Development Research Centre of the State Council, told a news agency.

Analysts also warned that financing difficulties had forced many SMEs to turn to micro-lending, whose excessive rates led to many of the bankruptcies. Recent research by the Administration for Industry and Commerce in Wenzhou showed that 23 micro-lending companies in the city have a total registered capital of 5.22 billion yuan (USD 809.14 million). They also have total bank loans of 2.51 billion yuan.

According to the China Economic Weekly, the annual rate of micro-lending in Zhejiang has reached 100 per cent, compared with many SMEs' turnover ratio of less than 10 per cent a year.

The National Bureau of Statistics released data showed that 88.7 per cent of the 269 sampled enterprises in Shenzhen experienced a price hike in raw materials, with an average rise of 10 per cent.

SMEs in China are also coming under growing pressure from rising labour costs, particularly those in the manufacturing sector, Lu Ting, China economist at Bank of America-Merrill Lynch in Hong Kong, said.

According to government figures, a total of 27 provinces and cities raised their minimum salaries in 2010. In March, Guangdong raised its minimum monthly payment to 1,300 yuan from 1,030 yuan last year.

(Agencies)