Small businesses drive China’s economy. The coronavirus outbreak could be fatal for many

The small companies that drive China’s economy are worried about how much damage the novel coronavirus outbreak will cause. Without help or a reprieve from the disease, many may have only weeks to survive.

While some larger companies are reopening their doors after weeks of lockdowns designed to contain the epidemic, small businesses often can’t comply with the strict health rules now required in many regions and many don’t have the option of letting employees work from home.

A survey of 163 companies of all sizes across China found that less than half were able to get back to work this week, according to investment bank China International Capital Corp, which published the results. Even more alarming: A third of roughly 1,000 small and medium-sized companies surveyed by academics from Tsinghua University and Peking University last week said they could only survive for a month with the cash they have.

That could spell terrible news for China’s entrepreneurs — and an even worse reality for the country’s economy. About 30 million small and medium-sized businesses contribute more than 60% of the country’s GDP, according to government statistics published last September. The taxes they pay account for more than half of government revenue, and they employ more than 80% of China’s workers.

It’s not clear how many of those companies will ultimately feel the full impact of the virus. Surveys cover only a tiny slice of the sector, and the full extent of the outbreak’s consequences are still impossible to determine. But many small companies were already struggling before the coronavirus began infecting tens of thousands across the country. The world’s second largest economy has been slowing down due to a combination of rising debt, a slump in domestic demand and a trade war with the United States. Now they face going without business for weeks on end.

“The coronavirus could be the straw that breaks the camel’s back,” wrote Zhao Jian, director of the Shandong province-based Atlantis Research Institute in a research note earlier this month. He warned that if the outbreak doesn’t end soon, unemployment will likely rise as businesses shut down — a problem Beijing had been fighting hard this year to prevent. Job losses could spur a tide of housing foreclosures, Zhao added, compounding the country’s economic woes.

A man wearing a face mask rides his bicycle along an empty street in Beijing on February 12, 2020.

‘We will die’ without more money

Some business owners have gone public with their plight. Beijing entrepreneur Wu Hai wrote on social media app WeChat this week that the outbreak could destroy more than 50 karaoke bars he runs across the country. The pastime has been halted as the government maintains a shutdown of popular entertainment spots where “cross infection risks” are high.

In the post, Wu lamented the closures and said the lack of business puts his 1,500 workers at risk of losing their jobs. He wrote that his company, MeiKTV, has about 12 million yuan ($1.7 million) in cash on hand, giving it about two months to survive if he’s unable to reopen for business.

“That means we will die in April unless investors continue to give us money,” he wrote.

Two women outside a karaoke bar in Hunchun, in China's northeast Jilin province in 2015.

Shu Congxuan, chairman of Home Original Chicken, said last Saturday that his fast food chain has shut more than 400 stores since the outbreak began. In a Weibo post, he warned that his company is in danger of running out of cash, since it still needs to pay rent and employees. But he said he would try to make sure his employees keep their jobs, even if he needs to sell his houses and cars.

Other companies appear to be taking desperate measures to recoup at least some of their losses. Beijing-based Meizhou Dongpo Restaurant said on Weibo that its employees have set up stalls to sell fresh vegetables on the street. While the company did not elaborate on the reason for its decision, a local government-run newspaper reported that the restaurant had purchased fresh produce for the Lunar New Year holiday season, but was unable to use it because of the outbreak.

The outcome for many businesses could be dire if the situation does not improve rapidly. According to the Tsinghua University and Peking University survey of firms, 85% of respondents said they would go out of business if the outbreak lasts three months. By the six month mark, 90% of the companies would collapse.

Workers work at Hytera Industrial Park in Longgang District of Shenzhen, south China's Guangdong Province, Feb. 10, 2020.

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Even a recovery in the near future may not come soon enough for some. Before the outbreak, Chinese companies were preparing to pay back or refinance a lot of debt this year, according to analysts at S&P Global Ratings. Given the rising risk to the economy, they may find it harder to borrow.

The S&P researchers warned in a note this week that if the public health crisis stabilizes next month, liquidity will still be under pressure through at least the first half of the year. They added that the outbreak will also heighten the risk of default for Chinese companies.

Government may need to do more

Beijing already knows that it has a major problem on its hands. Before the outbreak, senior officials had characterized the prevention of mass unemployment as their top priority for 2020. Now that the likelihood of mass job losses is increasing, the country is going all out to stop it from happening.

Some of the most prominent companies in China, for example, are taking in workers displaced by the outbreak. JD.com (JD), one of China’s largest e-commerce firms, earlier this week promised to open up more than 20,000 new positions. Alibaba (BABA) announced a similar plan.

The government is also stepping in. Last week, the People’s Bank of China pumped billions of dollars into the money market to shore up banks’ ability to lend money. The central bank also set up a 300 billion yuan ($43 billion) special fund to provide cheap loans to key companies in epidemic prevention. Meanwhile, the finance ministry announced government subsidies to make those loans even cheaper.

Workers sort packages at a delivery station for Chinese e-commerce giant JD.com on Singles' Day, in Beijing, China, 11 November 2019.

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Local governments in Beijing, Shanghai and several provinces have also rolled out targeted measures to help small businesses, including offering subsidies to landlords so they can reduce rents, and allowing small companies to delay the payment of social security contributions or taxes.

But it’s not clear how helpful some of those policies will be.

Wu, the karaoke bar owner, wrote in his WeChat post that he felt his company was still at a “dead end” even with the policies offered to him. Social security, for example, is still a major expense for employers. Wu suggested that simply delaying those payments would not really help.

“Social Security Bureau, how generous you are,” Wu commented sarcastically. “Our employees are going to lose jobs. The company is going to collapse. You not only don’t want to take some money out, but you still want to collect money from us — not even a penny less!”

Wu did not respond to a request for comment from CNN Business. But in his WeChat post he also criticized the usefulness of giving subsidies to landlords. While he said the policy is “well intended,” he questioned whether landlords would actually reduce the amount their tenants pay.

He also doubted the effectiveness of preferential loans set up by the central bank.

“We have no fixed assets as collateral. We have no operating cash flows — because we can’t open for business — as collateral,” Wu wrote. “Tell me, which small and medium-sized company can get the bank funding?”