OPINION> Commentary
Restructure SMEs, take industries to new areas
By Sun Lijian (China Daily)
Updated: 2008-09-05 07:34

The subprime crisis has had the US market shrink a lot and a large quantity of financial capital re-oriented to commodity markets or emerging economies, stirring greater fluctuations in the prices for the crude oil futures and assets in emerging economies.

Obviously, China's export-oriented development mode was affected greatly as the crisis imposed too much pressure on a driving force of the country's economic development - small- and medium-sized enterprises (SME).

These enterprises' profit margins have been greatly reduced by the rising manufacturing costs. Some firms had to suspend production or even close down due to rising costs and shrinking external demand. The harsh reality warns the authorities that the decades-old mode of economic development must be changed and improved so that the whole society's ability to withstand external economic shocks can be bolstered.

To be specific, the country must develop a domestic consumption- and innovation-led growth mode. To that end, the government must speed up industrial restructuring and improve people's income. And most importantly, measures must be taken to help the SMEs that are enduring hardships.

Yet there came some good news recently as substantial progresses have been made in this regard.

First, the government subsidizes part of these enterprises' financing cost through its fiscal policy. Once these firms are granted greater space in financing, they can save more money to transfer themselves to other production since an industrial transformation might be much easier for them than for large-scale companies. The policy may lead to improved efficiency of macro-economy and relieve pressure on employment.

Second, attention has also been paid to maintaining and stabilizing the monetary policy, even though at a time of severe inflationary pressure the call to loosen the monetary control is quite high. The government chose to widen loan channels for small and medium-sized enterprises rather than completely loosen the tight monetary policy, like interest cut, repurchasing of bonds and cutting of banks' deposit reserve ratio.

Pushing forward the industrial restructuring of small and medium-sized enterprises scattered around the Yangtze River Delta is the key point not only for ensuring a balanced and sustainable development of the country's economy, but also for creating new chances of growth for enterprises with less advanced technology and management in other backward areas. For example, industrial upgrading will transfer some labor-intensive manufacturing industries in developed areas to economically backward but resources-rich areas.

In such a case, we can forge a complete industrial chain with vertical labor division inside the country, as well as reduce our dependence on foreign investment. That will also reduce trade conflicts with other countries and reverse the situation of constant duplication of production in the country.

Third, if the new policies give priority to industrial transformation of small and medium-sized enterprises and the strategic regional industrial restructuring of the Yangtze River Delta, things will change in two aspects. First, foreign enterprises with high-end manufacturing, those of research and development as well as service industries, will gather in the delta; second, foreign capital for processing trade will move westward to backward regions to continue enjoying the competitiveness brought about by the low labor cost there. These processing enterprises will surly improve local employment and people's living standards. They are also expected to push forward the reform and restructuring of local State-owned enterprises.

Finally and most importantly, the process cannot work without the central government's support.

All this requires a lot of policy coordination and promotion, such as the reform of the value-added tax of enterprises, elimination of market barriers among different regions and introduction of democracy and accountability in administrative decisions. The monetary and foreign exchange policies, which are critical for the operation of small and medium-sized enterprises, also need the support of relevant industrial and fiscal policies to explore their full potential.

The author is a professor of economics with Shanghai-based Fudan University

(China Daily 09/05/2008 page8)