By the end of March, almost half a million businesses across China had closed – many in bankruptcy – and new business registrations had fallen by more than 30 percent compared to last year. Most of these companies are SMEs. Unregistered businesses, such as street vendors, are likely hit especially hard.
Getting back to work is an uphill struggle. Xin Guobin, Deputy Minister of Industry and Information Technology, said in March that while over 95 percent of larger companies had resumed operations, only 60 percent of SMEs had followed suit. Although it was reported that the production rate of smaller firms had passed 82 percent by the end of April, the sentiment among SMEs remains pessimistic.
The importance of a speedy recovery for China’s small-scale entrepreneurs cannot be overstated. SMEs account for 80 percent of jobs, 60 percent of GDP and about half of national tax revenue. They are vital drivers of China’s economy, populating the middle class and leading the country’s transition to consumption-based growth. Large-scale liquidations would threaten not only the country’s overall economic performance, but also its social stability.
Support for SMEs is top of the agenda
Beijing has made relief to SMEs a focal point in its battle against the economic damage caused by the Covid-19 outbreak. Within the first ten days after China’s Spring Festival, 600 policies in support of smaller firms were launched – with more in the pipeline. Preferential taxes, cuts in rental and insurance costs, and deferrals in electricity payments are all intended to reduce the liquidity strain on SMEs. However, tweaking operational costs alone will not be enough.
China’s banking industry has been called in, allowing firms to delay loan interest payments whilst increasing lending to SMEs. The People’s Bank of China (PBOC) is providing an incentive by making reserve requirement cuts conditional on targeted lending. It sounds good, but much of this is not new – the authorities started incentivizing banks to support financially stricken SMEs back in 2017, as part of the deleveraging campaign.
Indeed, the Chinese government has sought to strengthen SMEs for years. Competitive neutrality – the equal treatment of all companies, regardless of their ownership and country of origin – and major initiatives such as “Made in China 2025” are all intended to promote the role of small firms, particularly in national innovation chains. Special funds also exist to support innovative SMEs. Yet none of the attempts to get money to distressed SMEs has been particularly successful.