Caixin
Aug 28, 2018 05:36 PM
OPINION

Editorial: China’s Small Businesses Need Effective Support

Problems faced by small and midsize enterprises (SMEs) are once more attracting top-level attention amid increasing downward pressure on China’s economic growth.

On Aug. 20, the country’s State Council held the first meeting of its Leading Small Group for Promoting the Development of SMEs. The meeting re-emphasized the government’s commitment to equal treatment for state-owned and private enterprises, as well as for businesses of all sizes. The meeting’s emphasis was on old problems like difficult or expensive financing, and reducing or eliminating the tax burden faced by businesses. Two days later, the State Council emphasized at an executive meeting the need to see actual results from policies aimed at resolving SMEs’ financing troubles. The fact that two central government meetings in one week touched on the same topic shows how serious the situation is, and also shows the government’s resolve to deal with this difficult issue.

SMEs frequently receive unfair treatment on the market. This is a problem that should be directly confronted, and is also one that China has long wanted but failed to solve. The central government has issued many policies and documents aimed at improving the business environment for small and midsize enterprises over many years. In 2017, it even amended the law on the Promotion of Small and Midsize Enterprises. It is clear that the government’s emphasis is on supporting smaller businesses through financing and tax reform. However, these methods alone have not solved the fundamental problems faced by small and midsize enterprises. There has long been a gap between the government’s perception of its policies and the actual experience of businesses. China needs to find out why this gap exists, and close this gap as soon as possible. Otherwise, future policies will only become less and less effective. Ultimately, SMEs should be the judges of how policies are promoted and improved.

There have recently been unfavorable developments in China’s internal and external economic environment. China’s ability to stabilize and continue growing its economy depends largely on whether SMEs can surmount obstacles and increase their intrinsic dynamism. The importance of SMEs to the Chinese economy is clear. They account for more than 50% of government tax revenue, more than 60% of gross domestic product, more than 70% of technological innovation, and more than 80% of urban employment. Employment is the key to people’s livelihood. China’s Politburo recently called for the country to maintain six kinds of stability, the first of which was “stable employment.” In order to achieve this, SMEs must be allowed to shine. However, SMEs are varied and numerous, so implementing policies to encourage the growth of all such businesses will be extremely difficult.

Take the problem of financing as an example. SMEs in most developing countries frequently have difficulty obtaining financing. But Chinese SMEs also face unique institutional obstacles during the country’s current period of economic transition. China’s support system for SME financing is extremely weak. The recent State Council meeting encouraged financial institutions to extend more loans to SMEs, and called for them to shorten the loan approval process for these businesses. The State Council also proposed the establishment of an incentive mechanism that involves linking financial institutions’ performance appraisals to the amount of loans they offer to SMEs. These measures are purposeful and focused. But there still remains the problem of implementing them. Existing financial institutions have no motivation to provide support for SMEs, and this has become an invisible barrier undoing policy efforts to help these businesses. The State Council repeatedly emphasized at its meeting that financial enterprises should not demand commitment fees, fund management fees and other surcharges from SMEs, showing how intractable the problem is.

The direct cause of SMEs’ financing difficulties is the insufficient supply of financing. Even under the loose monetary policy implemented by China after the global financial crisis, SMEs received a limited amount of loans. Some people believe that financial institutions are biased toward large enterprises or state-owned enterprises when offering credit. This view is not unfounded. It is rational for financial institutions to be biased. This view is not unfounded. After all, SMEs have disadvantages such as opaque accounting, high operational risk and low competitiveness. This is exactly why China has struggled to solve the problem of SME financing. You can lead a horse to water, but you can’t make it drink.

If China wants financial institutions to voluntarily serve small and midsize enterprises, it cannot rely only on administrative orders, but must guide and encourage financial institutions through innovative mechanisms. For example, China can consider establishing financial institutions specializing in serving SMEs, as other countries have done. Non-governmental financial institutions are also irreplaceable, and should be actively supported by governments at all levels. If these private institutions are not currently regulated, regulation should be put into place. The government should formulate differentiated supervision policies in order to help financial institutions cope with non-performing loans to SMEs. The state should also encourage financial institutions to improve financial services and develop new financial products based on the needs of SMEs. In addition to credit, SMEs need to explore other financing channels, such as SME bond markets that are tailored to local conditions. Of course, the basis of financing is still the outlook and credit history of the business itself. A current major limiting factor is the fact that financial institutions are frequently unable to assess an SME’s credit history due to its lack of previous borrowing or incomplete information sharing. China needs to gradually eliminate the phenomenon of isolated islands of credit information.

The reduction of taxes and fees for SMEs has also been an important theme in recent years. The total value of corporate taxes and fees has been reduced, but these still form a serious burden for SMEs. Policies have not reached their full potential in terms of scope. The minor fixes currently being implemented are not significant enough to be meaningful. SMEs must pay a large number of taxes and fees. China should integrate and streamline these fees, and set them in a rational and transparent manner. The legal principles of taxation should be fully implemented as soon as possible. Some enterprises have not seen their tax burdens fall despite recent reforms, which analysts mostly attribute to increased enforcement and collection. Strict collection is not a bad thing, but to implement tighter enforcement at a time when doing business is difficult runs counter to the stabilizing purpose that fiscal policy should serve, and could negatively affect many SMEs.

Difficult financing and heavy tax burdens are two major problems for SMEs. But they are actually the symptoms of a deeper problem: the existence of multiple forms of discrimination and institutional barriers against SMEs. Therefore, improving the business environment and maintaining fair market competition should be the fundamental policy aim if China wants to promote the development of SMEs. In addition, China should deepen its efforts to decentralize and streamline governments. Both inaction or meddling in by government departments can be fatal for SMEs.

All economies must include big businesses, but it is the smaller enterprises that give an economy vitality and resilience. SMEs are often pioneers in technological and business model innovation, and they will play the main role in shaping the future of the Chinese economy. China will complete its shift from old to new economic drivers only when promoting the development of SMEs is no longer considered an urgent task for governments at all levels.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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