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Fiscal, Not Monetary Aid To SMEs
Summary:The EO interviewed Professor Zhou Qiren (周其仁), a member of the People's Bank of China's Monetary Policy Committee, who is head of Beijing University’s National School of Development. The school has just released a report covering 95 small businesses on the Pearl River Delta.

By Yang Xingyun and Shen Xing (杨兴云,申兴 )

Nation, page 12, Issue No. 540, Oct 17, 2011

Translated By Zhu Na

Original article: [Chinese

His answers have been edited for brevity.


EO: In the light of your research, how do you understand the difficulties facing small and medium-sized enterprises?

Small businesses have no pricing power. When they sell products, millions of enterprises are also selling products - there is international competition, and our small businesses have to compete on the global market with rivals in Vietnam and India. Not many of our small businesses have their own brands and patents, so their products cannot be sold at high prices.  

Small businesses also have no pricing power over the factors of production. They have to compete for workers, raw materials and energy.

It’s particularly difficult for small businesses to survive amid domestic inflation and the rising risk of a global downturn.


 EO: It’s often argued that the government should adopt special policies to support financing for SMEs.


There has been a lot of media coverage of SMEs’ financing problems, but our research indicates that the main difficulty for small businesses is not financing, but pressure from costs […] their products can’t be sold at reasonable prices, profit margins are shrinking, and capacity utilization is decreasing, which is the main issue for small businesses right now.

Under these circumstances, why do you need financing? Financing is used to expand a business, if operating profit is shrinking, businesses aren’t going to invest in expansion.

SMEs do indeed have financing problems, but this has nothing to do with macroeconomic conditions. Regardless of whether monetary policy is being tightened or loosened, SMEs have always had problems with financing.

What do we mean by the term SME, in particular what do we mean by “small business”? It’s an enterprise that doesn’t need to use other people’s money. It hasn’t been around for long and hasn’t built up much of a credit base. People are afraid to lend to such businesses; they depend on owners, their relatives, friends and contacts. With this support, they develop products and services to achieve a competitive position in the market and slowly build up a credit base.

In China, state-owned banks and large organizations dominate. It’s difficult for banks to provide proper financial services to small businesses. A loan for a small business only involves a few thousand or a few hundred thousand yuan, and the bank’s staff still needs to monitor it and do the bookkeeping.

In fact, our definition of small businesses used to include many large enterprises. There are now categories for small and very small businesses, which should improve the situation. If you take a comparison of the number of loans from all major banks, the proportion of lending to small businesses is very low. I believe that we should strive to improve the situation, but it won’t happen instantly, and the situation is the same around the world. This is also why governments have established a special project to provide better financing for small businesses. In the U.S., Japan, German, and especially those countries that have particular advantages in industry, these systems need to be promoted through policies.   

As for your question on China’s current situation, and whether the government should rely on the market to solve the problem instead of taking special action, I think this point of view still needs to be discussed. In my view, no matter how the government looks at it, most enterprises still rely on the market because even when the government wants to play a role, there is a limit to what it can do. But I don’t think the government’s concerns are unimportant, because the Chinese government’s intentions and policy guidance are still influential. It seems to me that the market and government are one. There is no such thing as a market without a government. Government is responsible for defining property rights.[...] No market can totally separate itself from the government since government is not outside the market, but is an integral part of it.

Let’s take another look at small businesses’ problems with financing. In our research sample, 20% of small businesses put the issue at No.7 in their list of difficulties. This is very interesting. People have all said that small businesses don’t depend on financing, 53% of them can finance themselves out of their own revenue. Some don’t borrow at all, and others don’t use formal financial channels. Even among those that borrow money, 62% borrow from their own relatives and friends, and these are typical small businesses.

Since a small business has no credit history, how can it borrow easily? How can people trust it? It doesn’t have many assets to use as collateral against loans […] so the owner can only turn to his or her kin. Among the 47% of small businesses which have raised funds, only 30% have used formal financial channels. In other words, only 12% of the funds used by small businesses are from bank loans. Therefore, difficulties in financing, especially financing through formal financial channels, should be accorded the appropriate status, neither ignored nor overplayed. If they’re overplayed, then mistakes will occur in picking the correct response.


EO: In the current conditions, many people have a different view on the prudent monetary policy (稳健的货币政策). They think the policy should be loosened.

Currently, real interest rates are still negative, why would we loosen monetary controls? And even if they were loosened, it wouldn’t make much difference to small businesses. If the monetary policy was loose enough for small businesses to borrow easily, then what would happen to labor costs? What about the raw materials costs? What about asset prices? In the end it will further harm the business environment for small enterprises. This is my personal view. So at present, given the prudent monetary policy, a larger share of the limited money supply should be directed to small businesses through fiscal policy, systematic policy and government services.

Only when the whole currency and financial situation is stable and the trend of asset price inflation is under control, can we improve conditions for small enterprises. If relatives and friends can earn lots of money by buying property, why would they lend you money to invest in industry? In the case of industrial enterprises, would they reinvest in their own businesses where profit margins are shrinking, when margins are higher elsewhere? This is why some small businesses encounter difficulties, including those Wenzhou bosses whose disappearance has been covered by the media in the last few days. If you look closely, none of the bosses who ran away were purely involved in industry.

It was all because of higher inflation in the last two years, which pushed up asset prices, changed relative prices and drew funds into speculative investments. If property investments are yielding 100%, then borrowing rates of 50% won’t mean much to them.[…] This is where the risk is, and when money is drawn in, prices will get higher and higher, until something triggers a fall - this is what people mean by a bubble bursting.

In my point of view, there’s no need to abandon the prudent monetary policy at least in the current conditions. On the contrary, it should be sustained. This is because our broad money supply is very high - more than 70 trillion yuan, for annual GDP of 40 trillion yuan  […] that ratio is fairly high. Of course, we need appropriate policies under the premise of a prudent monetary policy; I think it is the next policy challenge. […]

Personal tax has been reduced, but it hasn’t had much impact, business tax will have more impact. We need to reduce the burden on enterprises. The planned tax increases should be discarded, and the policy of tax reduction that has been under discussion for years should be launched soon, and will play a significant role. Tax cuts are more effective for small businesses than monetary policy relaxation.

The strengthening of the yuan has two effects. The relative price of our exports will grow, but the cost of imported resources will fall. However, our importers also incur intermediate costs - customs, taxes and fees – and it would be a big boost for small businesses if the cost of these transactions came down.



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