Gauging the current outlook for China's small and medium-sized enterprises (SMEs) is not easy. Depending on the way you a look at them, China's SMEs can be an unwieldy mass hard to regulate and prone to quality and intellectual property (IP) violations (as this blog has reported before), or a rising class of innovative entrepreneurs who traditionally struggle on their own, unable to obtain financing from China's banks.

For obvious reasons related to their vast numbers, varying sizes, locations, industries and types of business, they are not an easy bunch to pin down. Yet if you heard anything about SMEs in China in the last year, it is likely to be something related to how disproportionately they have been affected by the financial crisis, intermingled with sordid tales of falling exports and job losses. At the same time, the traditional story on SMEs is that they are not favoured lending targets for banks, and China is no exception to this.

China's large state-owned enterprises (SOEs) are now regular headline features with ever-larger investments and acquisitions the world over, yet SMEs are the backbone of China's economy. They are said to account for about half of tax revenues, 68% of exports and around 60% of GDP. According to statistics quoted here in June 2008, 99% of China's SMEs offered 75% of new jobs and created 50% of the country's wealth, although they have little more than a 10% share of the capital. Nevertheless, they are also said to be responsible for 65% of China's invention patents, yet China's State Intellectual Property Office is well aware of problems regarding a lack of awareness of IP protection, as 80% of SMEs in China supposedly have no IP department at all.

SMEs' struggle to obtain financing and the attendant economic hardship in China is well documented, and well predate the financial crisis. According to China Daily, in 2007 in Guangdong province, for instance, only 2% (amounting to USD 286 billion) of loans extended in the province were given to SMEs, while in the first half of 2008 it was reported that 67,000 SMEs in China went bankrupt while over 20 million factory workers could have lost their jobs. Electricity use by SMEs fell by almost 50% year-on-year during the first half of 2008, according to China's National Bureau of Statistics.    

Furthermore, China's small players are said to have been given short shrift in the government stimulus spending, as this has benefited mostly big state-owned firms. The Wall Street Journal's China Realtime Report this week reported on figures provided by China's central bank and banking regulator to illustrate how China's small businesses are currently doing at getting loans. SMEs, they said, accounted for 14.1 trillion yuan of outstanding bank loans at the end of September, up 28% year-on-year, whereas overall bank lending was up 34.2% in September. According to the Wall Street Journal's calculations, this meant that SME loans accounted for 36% of total lending, although it could actually be less than that. Yet by the end of the first half of this year, China's Banking Regulatory Commission reported that Chinese banks' outstanding loans to SMEs stood at 12.52 trillion yuan, accounting for 53.7% of the total outstanding loans to all enterprises. According to the Wall Street Journal, thus, the latest figures would seem to show that the explosion in bank credit has indeed been weighted toward large, state-owned companies, and that small firms' share has been shrinking.

Yet an official from China's Banking Regulatory Commission announced in September that China's five state-owned commercial banks and twelve joint-stock commercial banks have by the end of the first half of 2009 all established specialised institutions for providing financial services to SMEs, and plans are afoot to set up 1294 new rural financing institutions within three years. The official also stated, however, that even though SMEs in China currently enjoy the same finance and tax policies as larger enterprises, the non-performing loans ratio on SME portfolios is 4.5% as opposed to only 1% for large-scale enterprises. He called on the government to reduce the business tax rate for loans to SMEs.

A directive issued by the State Council on September 22 seems to have been aimed at this, and committed the government to loosening rules for bank loans to SMEs in order to tackle difficulties in raising funds. The directive promised tax breaks for small firms with an annual taxable income below 30,000 yuan for the year 2010. In August, after a meeting of the State Council chaired by Premier Wen Jiabao, it was decided that restrictions on SMEs entering certain industries will be loosened and detailed measures for government procurement from SMEs will be put forward. In addition, the creation of a Growth Enterprise board would be speeded up to increase financing options for SMEs, and subsidies will be offered to financial institutions that lend to new businesses. In October, Li Yizhong, head of the Ministry of Industry and Information Technology, disclosed to the media that China will continue to launch many favorable tax policies to support technology SMEs, like reducing by half the income tax payable of small enterprises, lower land use tax for SMEs, and the postponement of tax payments of SMEs who face certain difficulties. The National Development and Reform Commission has even encouraged China's SMEs to pursue foreign investment opportunities and to set up trading entities and overseas research institutions. It also affirmed the government's support on the development of small private venture capital firms via tax breaks.

So what ultimately can we take from all this? By their very nature, many SMEs all over the world will always struggle. Yet China's government seems aware of how important the well-being of China's SMEs is, and has acted accordingly. Indeed, it is possible to bicker about numbers and their veracity, but if the bank lending figures quoted above tell us anything, it is that China's SMEs have not been shut out altogether in favour of the SOEs (as some have feared), and perhaps their supposedly perennial struggle for financing is somewhat exaggerated. Yet if the high-level picture seems to be changing, it probably will not mean much to the myriad small businesses and workers that toil daily throughout the length and breadth of China to make a living, on their own accord. They may have a long way to go on intellectual property and quality issues, but with their problem-solving, adaptable way of doing business, they may in future be part of the solution rather than the problem.


Appendix: Additional recent SME-specific announcements:

• 2008-09: The B2B online giant Alibaba.com has launched a kind of matchmaking service for its members and banks. The service was launched last year in Zhejiang province, where Alibaba says 600 businesses used it to acquire loans worth more than USD 146 million. The programme has subsequently been expanded to Guangdong, Shandong and Jiangsu provinces and several coastal cities, and ultimately Alibaba expects to facilitate more than USD 878 million in loans. Because Alibaba can provide detailed information on its members, the key shortcoming that Alibaba is attempting to overcome in this way is the lack of a well-established credit rating system in China. 
• June 09: A central government fund plans to extend grants of 1.7 billion yuan to technology-based SMEs. Grants from an Innovation Fund will go to 2,725 projects from the IT, pharmaceutical, new material, new energy and environment protection sectors
• September 09: The China Association of Small and Medium-Sized Enterprises announced it was scheduling a series of 'speed dating' sessions in 14 cities to introduce SMEs to new financing sources. At a pilot event in Shiyan in Hubei province in May, contracts of nearly 1.8 billion yuan were signed 
• September 09: An article from CCTV reported that a bond insurance company dedicated to helping small firms issue corporate bonds was set up. Established by the National Association of Financial Market Institutional Investors and six large state firms including PetroChina, the new company aims to raise the credit level of SMEs through warrantees and by issuing financial derivatives
  
• October 09: China's long-awaited Nasdaq-style Growth Enterprise Market board is launched (see also this report). Hailed as an important step for stimulating enthusiasm for entrepreneurship and boosting private investment, the board will cater largely to technology and innovation-oriented startups that typically find it harder to obtain bank loans. The first 28 companies to list on the board, ranging from software to medical equipment makers, are said to have raised 16 billion yuan in their initial public offerings

Image: http://news.southcn.com