The unsung heroes of Asia's post-war economic miracle are its small and medium sized enterprises. As in much of the developed world, Japanese and Korean SMEs employ the vast majority of workers: seven and eight out of ten respectively. They are also big borrowers. In Japan last year they accounted for roughly 70 per cent of corporate loans; in Korea, almost 90 per cent of corporate loan books, and boasted a gross debt/equity ratio of 129 per cent. That dependence on credit also makes them potentially the next Asian shoes to drop.
In both countries, SMEs include some of the most vulnerable industries, such as construction and electronic parts makers. Such companies are suffering from slowing demand overseas and at home; witness, for example, the string of bankruptcies in Japanese real estate. All Asian governments – including China, which is now leaning on its banks to lend more to the sector – are painfully aware of the importance of keeping smaller businesses afloat. Tokyo is doling out more funds. Meanwhile, Seoul last month raised its ceiling for preferential loans, and earmarked nearly $4bn to support construction.
That is a drop in the ocean. Korean SMEs borrowed $4bn every month last year. But as banks ration credit and expansion plans are ditched, their monthly fix has been slashed by two-thirds. Continued funding problems at Korean banks suggest credit lines may be hacked back further, especially if Japan is any guide. Its banks' willingness to lend to SMEs is at the lowest level in at least eight years, according to the latest Bank of Japan survey. More small enterprises reported "severe" than accomodative lending conditions in the most recent Tankan survey of business sentiment.
Tokyo and Seoul know the score. An ailing SME segment means more job losses and bankruptcies, and hence mounting bad loans at the banks. Increased government support for these increasingly risky borrowers is the sector's best hope. For investors, any move to encourage bank lending without state support should be seen as a signal to sell bank stocks.
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