10/06/2011 04:57 EDT | Updated 12/05/2011 05:12 EST

China's premier urges help for debt-laden businesses as cash crunch deepens

SHANGHAI - China must do more to support the small businesses that provide the bulk of new jobs but are struggling due to tight controls on credit, Premier Wen Jiabao says.

Wen made the comments while making an inspection tour this week of Wenzhou in a visit that reflects growing concern over surging bankruptcies in a city famous for the vitality of its mostly small and medium-sized private businesses.

Wen, who is China's top economic official, also suggested Beijing might adjust some policies aimed at excess lending and combatting inflation, noting that the economy, growing at a rate of about 9 per cent, remains robust.

"We should maintain the continuity and stability of our policies while giving them more foresight, relevance and flexibility," he said in comments published Thursday.

China has ordered its state-run banks to keep record amounts of reserves to reduce excess lending, adding to the difficulties smaller businesses have in borrowing. That has prompted many to rely more on underground, informal lending, often at usurious rates.

"Effective measures should be taken to contain the trend of usury, crack down on illegal fundraising and properly handle the problems of collateral and capital shortage in order to prevent risks from spreading and evolving on a regional scale," Wen said in comments posted on the government website.

"Small businesses play an irreplaceable role in creating jobs and boosting economic growth," Wen was quoted as saying. "It is of overall and strategic significance to support their development," he said.

According to local officials, a lack of cash has forced one-fifth of Wenzhou's 360,000 small and medium-sized businesses to stop operating. In some cases, factory owners have fled, leaving millions of dollars in debt behind.

Wen reiterated the government's call for banks to lend more to smaller companies. Most big banks have tended to shun the private sector, instead preferring to lend to state-backed companies that hold more political sway.

The dichotomy between the cash shortages in the private sector and the relatively easy credit for state industries highlights imbalances in the world's No. 2 economy that are hindering the government's effort to create jobs and stimulate more private consumption.

Wen said banks should relax their tolerance for non-performing loans — contrary to the lenders' efforts to better contain risks, reduce costs to borrowers and set targets for expanding lending to the private sector.

Lending to the private sector has surged recently, with total outstanding loans at the end of July up 27 per cent from a year earlier to 9.85 trillion yuan ($1.6 trillion), state media reported Thursday, citing figures from the China Banking Regulatory Commission.

But the increase has been overshadowed by concern over the explosion in nonbank lending, often at rates far above the legal limit of four times the central bank's benchmark rate of 6.56 per cent.

Borrowing by local governments, mainly to finance construction projects but also for speculative investments, has also raised concern. According to the National Audit Office local governments had a combined total of 10.7 trillion yuan ($1.7 trillion) in such debt by the end of 2010. Economists put the figure much higher.

With highway and railway projects running short of cash, Zhejiang province — where Wenzhou is located — is beginning trial use of local government bonds to help close the funding gap, the official Xinhua News Agency reported.

Zhejiang will issue 8 billion yuan ($1.3 billion) worth of bonds to fund infrastructure projects this year, it said.

Usually, only the central government is authorized to issue bonds. Zhejiang's bonds are part of a trial program that marks a shift in how local government projects are financed, the report said.

It said much of the money would go to low-income housing projects, another area running short of financing.