Helping the little guy

China's small and medium-sized enterprises (SMEs) have been under the dual pressure of a domestic squeeze and the global economic slowdown this year and policymakers need to assess their predicament and take measures to bail them out.

SMEs, no doubt, are the most dynamic part of economies across the world. They can, for example, increase public consumption since their profits have been shared mainly among those who are most active in consumption. Therefore, it is widely accepted that proper supports should be given to aid their growth.

In China's case, its fast economic growth in the past three decades is, to a large extent, attributable to the rise of its SMEs, which are numbered at 42 million including individual business owners.

Accounting for more than 99 percent of the total number of enterprises, they have created 58.5 percent of the nation's total products and services, 68.3 percent of the nation's exports, half of the nation's tax revenues and 75 percent of the nation's jobs.

Those small but important enterprises have also absorbed a large number of rural laborers that move into cities, which promotes the country's urbanization drive.

A good number of these enterprises, meanwhile, have moved up the value chain and become hi-tech companies. SMEs, for example, account for 65 percent of the China's registered patents, 75 percent of the technical innovation projects and more than 80 percent of the nation's new product development. They have exported an increasing proportion of high-tech products, such as electronics and biotechnology products.

Traditionally, China's SMEs have faced such challenges as a lack of hi-caliber professionals and little access to bank loans. Now they have encountered new problems as a result of domestic credit tightening and the financial turmoil in the US and Europe that has led to reduced demand for Chinese products, many of which are produced by domestic SMEs.

It is an insurmountable hurdle for SMEs to get access to bank loans as they lack fixed assets to act as collateral and opaque financial documents. The traditional financial structure centered on big banks that favor big State enterprises worsens the situation.

Lack of funding has made it harder for SMEs to update their technologies, promote corporate innovation, hire competent professionals and purchase state-of-the-art equipment. In the Pearl River Delta, for example, less than 1 percent of its SMEs are run with equipment as advanced as in developed economies.

Moreover, those enterprises are put at a disadvantage in a legal framework that is born from the traditional planned economy and favors large State companies. Despite new laws and regulations that protect SMEs, it remains much harder, for example, for them to issue bonds and stocks.

Apart from those systematic and traditional bottlenecks, new developments in the domestic and overseas economic environment have brought new problems for SMEs.

Since last year, the authorities have raised the lending interest rates and bank's reserve requirement ratio many times, which has reduced capital available in the market. As a result, banks have usually raised the lending rate for SMEs by 30-40 percent.

Because the banks shun them, SMEs have to borrow from private underground lenders, which means they must shoulder much higher interest costs.

Rising labour, raw material and energy costs have further reduced their profit margins. The nation's strengthened implementation of environment and emission control laws and regulation has also increased the operational costs of many SMEs.

Since last year, the authorities have issued a slew of policies to balance the country's imports and exports to reduce its reliance on overseas demand. It has cut export tax rebates for a number of products and allowed the yuan to appreciate by about 20 percent since 2005. Those policies, coupled with the decreasing foreign demand as a result of the world economic slow-down, have pushed many SMEs to the wall.

Policymakers should not ignore the importance of SMEs in stimulating economic growth. Their prosperity constitutes the foundation of China's sustainable economic growth.

China has issued new policies to support SMEs, such as the expansion of bank credit quotas for SMEs. But it needs to take more measures, including fiscal, monetary and trade-related policies, to help them improve their competitiveness.

The government can also help them train professionals so that they can better cope with the challenge of technological upgrading to survive the market.

Reform should be introduced to the financial sector so that private capital can be allowed to invest in local financial institutions more freely. In this way, those local financial institutions may hopefully lend more to the capital-hungry SMEs.

Last but not least, a multi-tier capital market that includes a growth enterprise board must be established to accommodate SMEs. Those eligible SMEs should also be allowed to issue bonds. And venture capital should be bolstered to increase the financing channels of SMEs.

The author is a senior expert with the National Bureau of Statistics. The views expressed in the article are his own.

(China Daily 10/13/2008 page6)