Friday, December 13, 2013, 07:08
Asia Weekly: State spurs growth of China’s SMEs

Policy reforms and government support for Small firms are key to nation’s economic progress

For decades now, one of the key components of any effective retail distribution chain in China has been the network of xiaomaibu, small family-operated shops visible in just about every corner of every town and city in the country.

These xiaomaibu have long been the most direct suppliers of daily necessities, from toothpaste to instant noodles. Typically owned and run by a family, they are the quintessential small business. Some have managed to grow beyond that, into small chains or distributors of goods.

The National Bureau of Statistics says micro, small and medium enterprises (SMEs) account for 99.7 percent of all enterprises in China. They also account for more than 80 percent of all jobs in China.

“Compared to other countries, SMEs (in China) are in a better position because of local governments,” says Zhuang Juzhong, deputy chief economist at the Asian Development Bank. “They have access to credit through local governments.”

In recent years, these small shops have faced increased competition from large supermarket chains, and their resilience underlines the important role that small businesses play in the Chinese economy.

But the fact that large chain retailers are pushing some of them out of business suggests the future is uncertain for many of them, which often lack the access to credit and economies of scale to compete effectively.

SMEs are key components of any economy. They are typically the largest generators of labor and significant contributors to GDP. The downside is that SMEs are not particularly efficient economic units. They are typically less productive than larger conglomerates and rarely are they significant innovators, lacking the resources to generate innovation.

Through this year, the central government has taken a number of policy decisions to support SMEs. In the months leading up to the Third Plenum of the Communist Party of China in November, a pivotal meeting that resulted in a series of policy reforms, there was a lot of discussion of how China would help SMEs, in large part by facilitating their ability to access credit.

One key push is the creation of small and private banks focused on servicing SMEs, says Zhuang. Although access to credit is a challenge for SMEs anywhere, companies in China can often find support from local governments. This is due, in large part, to the fact that local governments are very focused on developing their local economies.

The evolution of SMEs in China is somewhat unique. Undoubtedly, many of them appeared over the past couple of decades as the country moved to develop a market economy. But many of them also emerged out of the system of township and village enterprises managed by local governments. Those enterprises, nominally owned by the State, were typically privatized as SMEs.

“China used to have small SOEs (State-owned enterprises) but they all privatized in the 1990s,” Zhuang explains.

Despite being small and private, many of them have managed to survive and grow, often by supplying goods and services to the now much larger SOEs that remained under the direct control of the government.

There are vastly different interpretations of what SME is. The China Banking Regulatory Commission says SMEs are companies with less than 10 million yuan ($1.6 million) in assets and sales of less than 30 million yuan, a relatively high number.

But even with local government support, SMEs in China often have difficulties accessing credit. The commission says only about a fifth of all bank loans in China go to SMEs while banks, many of them State-owned, prefer to lend to SOEs with plenty of assets and government backing.

Nevertheless, developing SMEs is a matter of practical concern for the government, given the sheer size of the sector.

The government has made it clear that it wants to channel more funds from large SOEs to the smaller firms that support them.

In August, the State Council issued guidelines with eight measures to help small and micro-sized enterprises grow. The emphasis was on developing new financial institutions and encouraging existing ones to develop more products geared at SMEs.

In October, the government took steps to make registering a company easier, a move that could lower costs and regulatory requirements for smaller businesses.

These policies and the reforms suggested after the Third Plenum in early November are not isolated events. The current 12th Five Year Plan (2011-2015) includes a strategy to drive the growth of SMEs that would see this sector expand by about 8 percent per year.

Such policy reforms and support for small businesses are key if China is to maintain its level of economic growth, according to Zhuang.

“They are very important,” he says. “SMEs are the largest source of job creation.”

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