WENZHOU - In this wealthy eastern Chinese city known for its shrewd merchants, the owner of a factory that makes spectacles faces a difficult task: closing his money-losing business and dismissing his workers.  

The impending demise of this workshop typifies the struggles of small manufacturers in China, where soaring borrowing costs are eroding already-thin profit margins, forcing firms to either fold or cut production.

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"This business is not tenable anymore. We are quitting!" the owner cried.

As China enters its ninth month of monetary tightening, small- and mid-sized private businesses increasingly find themselves in a bind, caught between stubbornly high inflation and a lack of financing stemming from the government's effort to combat those same price rises.

Everything from property to raw materials is getting more expensive. At the same time, interest rate rises and lending curbs since October that force banks to ration loans have deprived many of funding. That relegates them to an underground lending market where rates spiral as high as 120 percent.

Wenzhou's problems are not unique. Companies across China's eastern manufacturing belt are struggling with surging costs and dwindling profits.  

With small- and medium-sized enterprises accounting for 80 percent of all jobs and 60 percent of industrial output, according to government officials.    

"It's an unintended and unfortunate consequence when credit is tightened through quotas," said Tao Wang, an UBS economist in Hong Kong. "Small companies suffer first, and suffer the most."  

HELP WANTED

"The price of everything is rising, except the price of our products," said a woman surnamed Chen, adding that she worries about the future of her business, which makes sparkling plastic beads for fashion accessories.

She needs to leave the run-down building soon as it is due for renovation. But she cannot afford to rent a similar space as rents have surged beyond her budget.

"We just can't hire any workers. The minute they step into the factory, all they want to talk about are wages," she said, as she pinned the beads onto a metal frame to be spray-painted silver to add lustre to their shine.

Her workshop runs 12 hours a day now, from 24 hours before.

Chen is not alone. The gates of nearby factories were plastered with help-wanted ads, and other factory owners said they are rejecting sales orders because they cannot find workers.

Like other Chinese cities, monthly wages in Wenzhou are rising an average 20 percent annually. Still, some workers say that is not enough as rising expenses have outstripped gains in salaries, which start from 1,310 yuan ($202) per month.

Businesses say they cannot pay more because they do not have the flexibility to lift their own prices enough to fund higher wages, especially with profits already shrinking.

"Our costs have gone up a lot, but we can't pass it on to customers," said Yu Jiabin, a manager at Wenzhou Yaorui Lighters Pte Ltd. "Market competition is still very intense."

Some economists warned, however, that the Chinese government will not be in a hurry to ride to the rescue of all SMEs.

"It's necessary for China to squeeze out some low-end companies and give more space to high-value-added firms to expand," said Chen Yong, an economist at Huatai United Securities in Shanghai.