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Staying Afloat

It is urgent to save China’s private small businesses to shore up the country’s employment and consumption

By NewsChina Updated Jul.1

The streets of Guangzhou, Guangdong Province are busier as people from other places were allowed to return to the province for work, April 13, 2020

Millions of small- and medium-sized enterprises (SMEs) in China, most privately owned, had suffered a 69.5 percent year-on-year decline in revenue by March 31 due to the Covid-19 pandemic, according to a recent analysis by the Institute for Fintech Research at Tsinghua University.  

The research found that in the first quarter, turnover of these SMEs was less than half that in the same period of 2019.  

As the country’s private sector is struggling in the aftermath of the pandemic, there are risks to employment and consumption.  

Securing employment topped the list of six priorities set by the Chinese central government in 2018, and again in April this year. Documents issued by the central government state that private businesses, including companies and self-employed entities, created more than 80 percent of the country’s urban jobs. Most private companies are SMEs. From 2017 to 2019, some 60 percent of college graduates in China were recruited by SMEs, according to China’s Ministry of Education. Around 200 million people were working for 88.53 million self-employed entities by mid-March, according to the State Administration for Market Regulation.  

In China, a self-employed entity is not registered as an enterprise, and has lower standards and processes of registration and taxation. Self-employed entities also employ people to work for them.  

The recovery of livelihoods and businesses began in March, and it is expected to accelerate in the following months after draconian restrictions nearly froze the economy at the peak of the pandemic in the Chinese mainland in February.  

Lin Zeyan, an official with the All-China Federation of Industry and Commerce, said at a press conference on April 16 that a survey they commissioned showed more than 91 percent of private enterprises had resumed operation by early April.  

However, analysts are worried that many small businesses, including private SMEs and self-employed entities, are still in danger of closure due to the pressures of shrinking demand and broken supply chains. The question is how to save them quickly and effectively.  

Vulnerable Sectors
More than 97 percent of businesses Tsinghua researched saw revenue of no more than 50 million yuan (US$7.1m) in 2019. The researchers are also tracking SMEs which have shut down, although they are still registered with market regulators. One of the researchers, Li Pengfei, told NewsChina that two sectors were particularly hit. One is those which attract consumers offline. For example, in March, most companies in the catering industry were not back to pre-shutdown levels of business, and turnover in the education market was 12 percent of that in the same month of 2019.  

The other is firms on sophisticated long supply chains, particularly those involved in foreign trade. He said this could mean regions with highly integrated manufacturing, such as the Yangtze River Delta, may take longer to recover than those in the less developed western area of the country.  

Chen Long, a researcher with the Chinese Academy of Fiscal Sciences, agreed that small businesses focusing on offline services and export-oriented manufacturing were particularly vulnerable. In the first four months of the year, China’s foreign trade was down by 7.5 percent year-on-year, with exports down by 9 percent measured in US dollars, according to China’s General Administration of Customs. As the overseas market is likely to further shrink in the next one or two quarters, small- and medium-sized export manufacturers are facing broken supply chains and bankruptcy. Chen estimated that 15 to 18 million jobs may disappear as a result. He is also concerned that SMEs in the services sector will continue to struggle due to weakened consumer demand, rising costs and tied-up capital in the form of fixed costs such as rent.  

Although the whole country is speeding up production, Chen said that many SMEs are at high risk of bankruptcy. Many have been struggling for years and the pandemic has made things even worse, he said. On one hand, they still had to pay salaries, rent and utilities when business was suspended and continue to do so despite not operating at normal capacity, and on the other, demand has declined. According to the State Administration of Market Regulation, rent and utilities account for 15 to 50 percent of restaurant operating costs. In addition, Ning Jizhe, head of the National Bureau of Statistics of China, wrote in an article on May 1 published in the Qiushi Journal run by the Communist Party of China Central Committee that although some firms have reopened, production facilities were not running at anywhere near full capacity, orders were down and employees were not back to their full duties.  

“It will be hard for many to last much longer after already struggling for three months,” Liu Qiao, dean of the Guanghua School of Management, Peking University told NewsChina.  

Workers at a factory in Dongguan, Guangdong Province return to work, March, 2020

Throwing a ‘Lifebelt’ 
There is consensus among policymakers and economists that small businesses are not only the mainstay of employment in China, but also the main driver of consumption. The central government and local authorities have adopted measures to support small businesses, including SMEs and self-employed entities, in the past few months. At a press conference on April 16, Qin Zhihui, vice director-general of the SME affairs department of the Ministry of Industry and Information Technology, told media that these measures focus on reducing operational costs, granting more access to credit and providing e-commerce services for SMEs.  

Liu Qiao told NewsChina that their research shows that more than 200 measures have already been announced by the central government, and more than 800 measures have been issued at local levels aimed at reviving the country’s economy. More are expected. However, Liu said the measures are too piecemeal to benefit small businesses effectively. As it has become clear that the pandemic’s shockwave will be stronger and longer than most economists predicted, Liu believes that a bigger, more targeted stimulus package has to be given to enterprises immediately as a “lifebelt,” enabling them first to survive and then to rebuild their business. 
Although China’s central bank has already injected enormous liquidity into the market since the pandemic outbreak, it has long been a problem that this monetary policy does not mean that business can easily access the loans they need from banks at low enough interest rates. Commercial banks must control the risk of bad loans. Given this, Liu proposes there should be an immediate fiscal package to act as a stability fund for SMEs or a risk-sharing mechanism between commercial banks and fiscal funding for credits to SMEs.  

Professor Chen Yuyu, director of the Institute of Economic Policy Research, Peking University, called for a short-term direct rescue package for small businesses such as subsidies for wages and extensions to tax rebates. Small businesses should share market opportunities related to new infrastructure projects based on information technology, he said. 

Both the government and experts stressed that not all small businesses should be saved. Chen Long said that only those with good prospects but which are experiencing temporary difficulties should be covered in any rescue package. He advised there should be a supervision mechanism to ensure money will not be spent in the wrong places. Xiao Yuanqi, chief risk officer of the China Banking and Insurance Regulatory Commission, said at a press conference at the end of February that SMEs already at the brink of collapse before the pandemic cannot access the emergency support. He added that SMEs in sectors and areas which have been hit the hardest in the pandemic would have a greater chance of being helped, including retailing and wholesale, catering, tourism and logistics in Hubei and its neighboring provinces.  

It is urgent to save the minnows to keep the world’s second-largest economy strong.