Financing Difficulties and Structural Characteristics of SMEs in China
34China & World Economy / 34-49, Vol. 12, No. 2, 2004
Financing Difficulties and Structural
Characteristics of SMEs in China
Yanzhong Wang*
Abstract
China’s reform and opening-up policy has created a good environment for the development
of small- and medium-sized enterprises (SMEs), especially the burgeoning SMEs in the
private sector. In the meantime, SMEs have been playing an important role in China’s
economic reform and development and, to some extent, have become a growth engine in the
Chinese economy. However, SMEs are still facing many financial difficulties due to various
reasons, such as lagging in the banking system, an inadequate financial structure, lack of a
guarantee system, etc. This paper will analyze the structural roots of SMEs financing
difficulties and put forward possible measures to mitigate such financing obstacles.
Since China’s reform and opening up, the market-oriented reform of the country’s economic system has gradually engendered labor and capital markets, which have promoted an organic combination of rich labor resources and increasingly expanded capital resources. The development of SMEs, especially the sharp rise in non-state-owned and non-public-owned enterprises, have provided a vast space and permanent vehicle for this type of combination. Although the overall size of the state-owned economy is still increasing in terms of number of enterprises and developmental potential, non-state-owned SMEs have become a main part of the Chinese economy and played an increasingly important role in the national economy and social development.
*Yanzhong Wang, senior fellow, Bureau of Scientific Research, Chinese Academy of Social Sciences. E-mail: wangyzh@https://www.wendangku.net/doc/a38048359.html,.
Financing Difficulties and Structural Characteristics of SMEs in China
35
I. Financial Environment in the Process
of SMEs Development
1. The Development of SMEs
With the rapid growth of the Chinese economy, many kinds of SMEs have been established and gradually developed. In 1980, the number of industrial enterprises at the level of collective township and village enterprises and above (excluding village and family enterprises), was about 377,300. Among them were 1,400 large enterprises, 3,400 medium enterprises and 372, 500 small enterprises, about 0.37, 0.90 and 98.73 percent of all firms respectively ( National Bureau of Statistics, 1981, p. 204). In the same year, China had 1.81 million commercial enterprises (including private businesses), more than 99 percent of which were SMEs. The number of individually owned enterprises was 686,000.
The Chinese economy experienced rapid growth in the 1980s, and there was a tremendous boost in the number of SMEs. In 1990, the total number of industrial enterprises reached 7,957,800. The proportions of large, medium and small enterprises were 0.95, 2.27 and 96.78 percent respectively.1 The significant increase in the number of SMEs reflects the objective reality of its fast development at the time. Apart from an increase in industrial enterprises, the number of construction, commercial, food-and-beverage and service enterprises all increased by over 300 percent over 1980 (NBS, 1991, p. 16-17).
In the 1990s, the Chinese economy maintained a trend of steady and rapid growth and the overall scale of the economy continued to expand. According to the new standards on the scale of industrial enterprises carried out in 1998, there were 7,864 large enterprises, 14, 371 medium enterprises and 139,798 small enterprises – about 4.85, 8.87 and 86.28 percent of
all firms respectively (NBS, 2000, p. 412-413). Compared to figures from 1980 and 1990, while there was an increase in the proportion of large and medium-sized enterprises, the proportion
of small enterprises decreased by 10 percent. There were several reasons for this: (1) Large and medium-sized enterprises increased their scale after the structural adjustment, merge and acquisition; (2) With the improvement of the enterprise differentiation standard, a great number of SMEs could not be brought into the statistical category due to their small scale. The number of SMEs decreased (the statistics for the number of firms in 1999 was 38.9 percent of the 1990 figure) and, naturally, the proportion of large and medium-sized enterprises increased; (3) Since the mid-1990s, China has switched from a shortage economy
1 Beginning in 1984, statistics on village-owned, city and rural jointly owned, and private businesses were arranged as industrial enterprises (previously arranged as agricultural statistics), and nearly all of these firms were small or even micro-enterprises. This change in statistical measurement drastically increased
the number of SMEs.
36Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
to a buyer’s market. The expansion of the opening-up policy and the Asian economic crisis exposed Chinese enterprises to more ardent international competition. Due to the system reforms, the number of state-owned SMEs was cut down largely. Many non-state-owned SMEs also left the market for many reasons, including the pressures of environmental protection, capital difficulties, increased tax burden and fierce market competition. On the whole, it is already difficult to maintain the previous growth momentum in the number of SMEs as seen in the 1980s and 1990s.
Since the late 1970s, the reform and opening-up policy and objective terms of the phase of economic take-off have provided a good external environment for the development of SMEs. Therefore, the increasing number and variety of emerging SMEs not only impelled the development of local and national economies, but also became an important indicator for a boost in the Chinese economy.
Today, SMEs are getting stronger and continue to contribute to the development of Chinese society and economy. They exert the same function as SMEs in other countries,which is mainly expressed by promoting employment, technological innovation, training of entrepreneurs, developing international economic relationships, accelerating market competition, maintaining economic vitality, and so on. Comparatively speaking, the special nature of Chinese SMEs manifests their specific influence on the transition of China’s economic system and social structure. For example, the development of non-public-owned
Table 1. The Scale Structure of Independent Accounting
Industrial Enterprises (1980-2001)
Unit: ten thousand Year 1980199019951997a/1997b/1999c/2000c/2001c/
Number of
Independent
Accounting Units
377.3
417.1
592.1
534.4
468.5
162
162.9
171.3Large Enterprises Number 1.446.47.27.27.988.6%0.370.951.011.351.534.854.905.01Medium Enterprises Number 3.49.516.616.816.714.413.714.4%0.902.272.803.133.578.878.448.41Small Enterprises Number 372.5403.7569.1510.4444.6139.8141.1148.3%98.7396.7896.1195.5194.8986.2886.6686.58Source: NBS, China Statistical Yearbook (1981, 1991, 1996, 1998, 2000, 2001, 2002). China Statistical Press.
Note: a/ refers to various industrial enterprises funded by organizations above the township level, excluding villages, individual enterprises and other businesses. b/ refers to independent accounting industrial enterprises. c/ refers to all state-owned enterprises and non-state-owned enterprises with a scale of (or above) annual total sales of 5 million yuan.
37 Financing Difficulties and Structural Characteristics of SMEs in China
SMEs not only changes the enterprise ownership structure, but also lays an important foundation in the process of developing China’s market economy. At present, the number
of non-public-owned Chinese enterprises far exceeds the number of state-owned firms. Excluding over 20 million individually-owned enterprises, the proportion of formally registered non-state-owned legal entities grew from 26.1 to 59.5 percent between 1996 and 2001 (Table 2). The proportion of non-state-owned enterprises also far surpassed state-owned ones. According to the statistics on industrial value-added output, in the first three months of 2003, the state-owned and collective economy fell to 30 percent, while the non-public-owned economy jumped to 70 percent.
2. Evolution of SMEs Financing Policy
Since China’s reform and opening up, SMEs have gradually enjoyed a healthy external environment for development. By reforming the system of a planned economy, the nation relaxed its limitations on the development of SMEs so that urban collective enterprises, township and village enterprises, individual businesses, private enterprises, foreign-funded enterprises and joint ventures could rapidly develop. Regarding the various forms of SME ownership, different development policies were adopted. For state-owned SMEs, from its efforts to “decentralize authority to release benefits” (fangquan rangli) in 1978 to “grasp the large and let go of the small” (zhuada fangxiao) adopted at the Third Plenary Session of the 14th Central Committee in 1995, the government’s policy has focused on reforming the
old system which did not adapt to the demand of a market economy. In the mid-1990s, China adopted the policy of “deregulation to render agile” (fangkai gaohuo) and privatization policy for small-sized state-owned enterprises. Many state-owned and collective SMEs reinforced their competitive activities through reform and “privatization”, which transformed
the system of property rights and management. As for non-state-owned SMEs, China mainly adopted policies of relaxing policy restrictions, granting political acceptance and financial support, and gradually established a market environment of fair competition and
Table 2. Change in the Number of Enterprises with Legal Entities and Their Ownership Structure ( 1996 and 2001)
Number of legal entities (ten thousand)Proportion (%)
State-Owned Economy Non-State-Owned Economy Total Number 1996
194.3
68.5
262.8
2001
122.7
179.9
302.6
1996
73.9
26.1
100
2001
40.5
59.5
100
Source: NBS, 2003.
38Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
legal protection. As the main body of SMEs, township and village enterprises, individual and private enterprises that rapidly developed in the mid- to late-1990s, gradually improved their status and function in the national economy.
Since the mid-1990s, developing SMEs has been an important strategy in China.
The Asian financial crisis of 1997 made the Chinese government and academic circles completely rethink the shortcomings of the simplistic strategy that relied on large enterprises. The government and its institutions came to recognize the need to stress the development of SMEs. Later, a unified administrative framework for all types of SMEs began to take shape. Because of the successive governmental institution reform in 1998, some government departments of various industries were incorporated into the State Economic and Trade Commission.2 At the same time, a SME department was established in the State Economic and Trade Commission, the highest-level comprehensive management department in charge of reform and development policy of SMEs. Since the trend for the township industry to transform into an urban one is growing, the management of the village and township industry will be gradually consolidated with urban management. Government departments at different levels gradually adopted some accommodating policies to begin building a specialized support service system. From 1999, the Ministry of Finance and other departments started to actively establish a SMEs loan guarantee system. By 2001, they published some laws and regulations, such as the Provisional Regulation of SME Credit Guarantee System and Management Methods of Credit Guarantees for SMEs.3 By the end of 2000, 30 provinces, municipalities and autonomous regions in China had opened pilot sites for the SME credit-guarantee system, established more than 200 credit-guarantee institutions, raised a guarantee fund of 10 billion yuan, and put forth an important effort to improve the credit environment for SME development. The Ministry of Science and Technology provides 10 billion yuan per year to build venture capital funds for hi-tech enterprises. Shanghai established the Shanghai SMEs Service Center, which released 13.9 million yuan in credit to 11 SMEs from June to September 1998 (Yao Jun, 1999). The Shanghai Branch of the China Industrial and Commercial Bank set up SME credit departments and took 10 measures to support SMEs. By April 1999, it had shelled
2 The government in 200
3 united parts of departments from the State Economic and Trade Commission
with the State Development and Planning Commission, and the State Economic System Reform Office to form the State Development and Reform Commission.
3 “The main targets to guarantee are hi-tech SMEs. The guarantee system is organized by the central
government guarantee companies and local government finance with the subsidy from the Ministry of Finance according to the market principle.” (See Xiang Huaicheng, 1999).
Financing Difficulties and Structural Characteristics of SMEs in China
39
out about 300 million yuan in credit to SMEs.4
Throughout the reform process and especially in recent years, China has begun placing
an emphasis on the issue of supporting SME development. But there are still many problems
in the relevant policies. First of all, China lacks a long-term, systematic, unified and relatively independent SME development strategy and policy system. Second, the SME management system and relevant policies are inconsistent, and basic management is weak. Furthermore, since the design of the social service system is severely behind the times, the burden of taxation and quotas is heavy. Finally, without sufficient financial support for SMEs, difficulties in obtaining loans and raising funds will block SME development.
II. Financing Condition and Structural
Characteristics of SMEs
1. Financing Condition of SMEs
In recent years, many research groups in China conducted several sampling surveys on the financing condition of SMEs – some of which were continuous and comparable. The following are some of the findings from the research group headed by Lin Hanchun, which conducted two separate surveys on the financing condition in 1998 for 2,000 SMEs and 14, 000 SMEs; it collected 303 and 3,027 valid questionnaires respectively. The first survey showed that the major capital (more than 50 percent of the total assets) of three-fourths of the surveyed SMEs came from self-accumulation. Among the surveyed SMEs 53.5 percent,
or 162 enterprises, took out bank loans; to be specific, among the surveyed enterprises, 66.
7 percent of state-owned, 47.1 percent of collective enterprises, 53.7 percent of private enterprises, and 34.5 percent of joint ventures borrowed from the banks. Most of the loans came from state-owned commercial banks. The survey also showed that among the enterprises which took out bank loans, 94 percent of state-owned enterprises (SOEs) and
70 percent of the joint-venture companies obtained loans from state-owned commercial banks; 58.3 percent of the collective enterprises received loans from state-owned banks and 25 percent borrowed money from rural credit cooperatives (RCCs); 40.9 percent of private enterprises got loans from state-owned commercial banks and 25 percent of them borrowed money from individuals or non-financial institutions.
The sample of the second survey was widened. However, results of the two surveys
on the SMEs financing condition were almost the same. Among the enterprises surveyed,
4 See “Service System for SMEs Established by Shanghai Industrial and Commercial Bank”, China Township Enterprises, No.7, 1999.
40Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
55 percent, or 1,666 enterprises had obtained loans, although their investment and
operations mainly depend on self-owned capital. The second survey revealed that 67 percent of the surveyed SMEs raised their fixed assets investment by themselves; 81 percent had more than 50-percent self-raised fixed assets investment; and only 3 percent had an initial fixed-asset investment totally borrowed from financial institutions. There were more enterprises getting loans for working capital than for fixed assets investment, and the amount of loans for working capital was more than that for fixed assets investment.
Regarding working capital, 55 percent of the surveyed enterprises had 100 percent working capital based on self-owned capital; 24 percent had more than 50 percent of working capital based on self-owned capital; 12 percent had less than 50 percent working capital based on self-owned capital; and only 9 percent got loans for the total working capital.
(Table 3).
The Project Group of the Research on Chinese Private Enterprises organized by China Industrial and Commercial Union and Research Commission of Chinese Private Business conducted five nationwide sampling surveys on private enterprises in 1993, 1995, 1997, 2000 and 2002. The first two surveys showed that the scale of private enterprises was small at the time and that the average registered capital was 0.286 million yuan in 1993 and 0.4 million yuan in 1995. When private enterprises were established, 65.5 percent of capital came from self-accumulation; 21 percent from bank loans and RCCs; and 13.5 percent were borrowed from friends, relatives and individuals (Li Lulu, 1998, p73-75). The 2002 survey showed that average capital of private enterprises amounted to 2.50 million yuan, but self-accumulated money was still the major source for starting up businesses (about 55 percent).
When commencing a business, most of the needed funds came from all kinds of accumulations and private lending, not bank loans. Among the 3,258 surveyed enterprises,
31.6 percent, or 1,029 enterprises, borrowed money privately and 23.4 percent (760 enterprises)
borrowed money from banks and RCCs. Among the 954 surveyed enterprises that borrowed
Table 3. Proportion of Sources of Assets
Among Surveyed SMEs (1998)
Ratio to Total Assets Fixed Assets Investment Working Capital
Ratio of Self-Owned
8
11
14
67Ratio of
Loans
77
13
7
3
O t h e r
Sources
84
7
5
4
Ratio of Self-
Owned
9
12
24
55
R a t i o o f
Loans
67
20
10
3
O t h e r
Sources
21
10
5
4
Under 50%
50% - 99%
100%
Source: Lin Hanchuan, 2003.
41
Financing Difficulties and Structural Characteristics of SMEs in China money from banks and RCCs, 30 percent borrowed money less than 100,000 yuan and 73.4percent had bank loans of less than 1 million yuan when they commenced business (Table
4).
The bank loans took a considerable proportion in the source of capital of township and village enterprises (TVEs), but fell in the late 1990s (Table 5). This showed that the reform of the TVE property rights system diversified investment sources. It also reflected that banks and RCCs reduced loans for TVEs after the central government adopted a tight monetary policy in 1993. According to a survey of 116 SMEs (80 percent more of them were collective enterprises) in South of Jiangsu Province by the Jiangsu Academy of Social Sciences in 1998, 25.4 percent of the surveyed enterprises (30 enterprises) raised major investment from bank loans; 23.7 percent (28 enterprises) from employees; 16.9 percent (20enterprises) from village communities; 16.1 percent (19 enterprises) from self-accumulation;
6.7 percent (8 enterprises) from private lending; and 11 percent (13 enterprises) from other sources.5
Table 4. Money Borrowed from Banks
and RCCs by Private Enterprises When Starting Business
Unit: ten thousand yuan
Loan Groups
<0.5
0.5 - 1
1 - 5
5 - 10
10 - 15
15 - 20
20 - 30Number of Samples 3523128112298662Percent 3.662.4113.4211.743.049.016.50Loan Groups 30 - 5050 - 100100 - 200200 - 500500 - 1000>1000Total Percent 11.8411.744.5115.513.143.46100Number of Samples 113113431483033954
Source: The Project Group of the Research on Chinese Private Enterprises, 2003
5
Jiangsu Provincial Academy of Social Sciences. “Research on the Development of SMEs in the South of Jiangsu, China”. Paper presented at International conference on Sino-Europe SMEs Cooperation,Beijing. March 26, 2000.Table 5. Investment Sources of TVEs ( 1992-1997)Year
1992
1997Bank Loan 38.922.6Self-Owned Capital 33.142.7Domestic Capital 7.912.1Foreign Capital 5.911.4Government Financial Support 6.02.2Source: Rural Development Institute of Chinese Academy of Social Sciences, 2001, p. 100.
42Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
2. Structural Characteristics of Indirect Finance for SMEs
(1) Financial services, especially the loans demanded for SME development far exceed the
actual amount supplied. Although most capital originates from self accumulation or fund-raising, when first establishing a small or medium enterprise, more than 50 percent of enterprises still rely on loans from financial institutions. During the production process and investment expansion (mainly working capital and some fixed assets investment), the demands on financial institutions are greater. If one wants to invest, there must be financing.
Except for some well-performing SMEs, the vast majority does not have enough self-accumulated capital to thoroughly meet investment requirements so they must find a way to fill the financing gap. Due to certain limitations, it is very difficult for SMEs to obtain capital or venture capital from the capital market directly. So to a great extent, unless they secure a private loan, SMEs must depend on loans from banks and other financial institutions to gain external capital. The above surveys suggest that the proportion of SMEs receiving bank loans is not high, which does not mean that they do not require loans, but rather that their needs are not satisfied. According to some estimates, enterprises that submit formal loan applications only account for about 30 percent of the total number of enterprises that need loans. Even if the rate of approval reached 100 percent, there would still be only 30-40 percent of satisfied loan need. This means that there is a significant number of enterprises whose loan requirements are not satisfied. In a survey conducted by Lin Hanchuan and others, 53.8 percent of sample enterprises (3,027) chose “scarcity in capital” as the most detrimental problem to enterprise development (Lin Hanchuan, 2002, p. 24).
(2) There is obvious difference in treatment for enterprises with different ownership,
region and size characteristics in obtaining loans from financial institutions. China is undergoing transformation of its economic system, and the enterprise ownership system becomes more diverse. From only two forms of publicly-owned enterprises, state-owned and collective enterprises, development has led to the coexistence of several forms of enterprise ownership: state-owned, collective, township, private, foreign capital, joint-stock and joint-operation enterprises. At the same time, non-state-owned SMEs also developed quickly. Owing to the delay in financial system reforms, state-owned commercial banks still have a monopoly on Chinese financial assets. To support the adjustment and reform of state-owned enterprises, control financial risk and reduce the ratio of non-performing loans, state-owned commercial banks (as an important part of the state-owned economy) still regard state-owned enterprises and publicly-owned enterprises as the main candidates for loans. Although the ratio of state-owned economy in Gross Domestic Product and fixed assets investment has decreased steadily in recent years, most financial resources are still released to state-owned enterprises. In 1999, the total amount of loans granted by Chinese
Financing Difficulties and Structural Characteristics of SMEs in China
43
financial institutions was 9.3734 trillion yuan – 69 percent (6.3888 trillion yuan) of which was injected into state-owned enterprises. In the same year, the stock market raised capital worth 94.5 billion yuan, of which 95 percent (89.8 billion yuan) was acquired by listed state-owned companies (Lin Xiaoyan, 2003). The non-state-owned economy has continually increased as a portion of the national economy, but the amount of loans obtained from state-owned banks (27 percent in 1999, or about 2.5054 trillion yuan) has been limited. The proportion of loans acquired by individual businesses and small private enterprises from state-owned commercial banks and financial institutions is even lower (Gan De’an, 2002, p. 111). The total amount lent to Chinese township and village enterprises and private enterprises in 2000 and 2001 was 671.54 and 733.1 billion yuan respectively, which was 6.8 and 6.5 percent respectively of total annual loans at the time(NBS, 2002, p. 662). The above surveys show that apart from raising capital by private sources, non-state-owned SMEs borrowed a higher proportion from non-financial institutions than banks. During the Chinese economic transition, the adoption of different credit and loan policies based on different forms of enterprise ownership caused the phenomenon of ownership discrimination.
With the development of a non-state-owned economy and the deepening of reform, the total amount and proportion of loans received by the non-state-owned economy increased. In the more economically developed regions, the non-state-owned economy received more obvious financial support. In Guangdong Province, for example, the proportion of loans that financial institutions provided to non-state-owned enterprises has exceeded the amount obtained by state-owned enterprises. In 1999, the proportion of loans allocated to the non-state-owned economy was 56 percent and, in 2002, it climbed to 65 percent. In Zhejiang Province, the civil credit relationship was well developed and alleviated the SME problem in obtaining loans from financial institutions. On the contrary, the non-state-owned economy in the central and western part of the country clearly received a much lower proportion of loans from financial institutions compared to more developed regions. This type of regional discrimination exerted a definite influence on the development
of SMEs everywhere.
In recent years, since the status of the non-state-owned economy is becoming increasingly important, ownership discrimination by financial institutions has gradually given way to “scale discrimination”. The majority of SMEs that easily receive loans are medium-sized enterprises or independent accounting units of a relatively large scale and good performance. Actually, some of these firms do not urgently need a loan. By contrast, small-sized enterprises, especially private and family-run micro-enterprises, are in desperate need of money during the business establishment and development process, but they are not granted loans due to various factors. This led to the emergence of two coexisting
44Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
phenomena in China: the difficulties that enterprises had in securing a loan and the troubles that banks had in finding clients. To alleviate the first problem, the People’s Bank of China and other relevant institutions adopted a series of measures. For example, the Rural Credit Cooperatives enlarged their scale of loans for township and village enterprises (504.1 billion yuan of loans were extended in 2002, an increase of 25 billion yuan compared to 2001), and expanded the scale of small credit loans to villages. In 2002, 56.84 million farmers received a total of 67.2 billion yuan of loans, accounting for 59 percent of the number of farmers who need loans and who meet the loan requirements, and 23.3 percent of all farmers (Rural Development Institute of the Chinese Academy of Social Sciences, 2003, p. 140).
Despite these measures, SMEs are still having difficulties in obtaining loans, and the loans they do receive are often small.
(3) The loan structure for SMEs is mainly concentrated on working capital loans and
short-term loans. In general, the production and management of SMEs is not stable due to scale limitations. Market fluctuation and some seasonal and temporary factors also influence enterprises operations. The capital needs of most SMEs present “small, few, frequent”
characteristics. The borrowed capital is usually for short-term purposes, most of which is turnover working capital. According to a survey, the frequency of SME loans is five times that of large companies, but the sum of loans per enterprise is 0.5 percent that of large companies. The following is the proportion of working capital to fixed assets among loans provided to SMEs by some banks in Shanghai: Industrial and Commercial Bank, 82:18;
Communications Bank, 95:5; Pudong Development Bank, 80:20; City Cooperative Bank, 92:
8. The term for these loans are also short – about 60 percent are limited to six months (Mei
Qiang et al, 2002, p. 58-59). Leqing County in Zhejiang Province investigated 524 million yuan of loans granted in the first half of 2000. The research showed that 91.4 percent of the loans (479 million yuan) were short-term loan of less than one year – 79 percent of which were ranged from three to six months (Chen Naixing ed., 2002, p. 229).
(4) SMEs lack specialized financial-service institutions and suitable credit system.
China has always had a very high savings rate, and the total savings deposits are increasing quickly with the growing economic scale. In 2002, the balance for deposits and loans of all kinds, in domestic and foreign currency in all financial institutions reached 18.3388 trillion yuan and 13.9803 trillion yuan respectively (NBS, 2003). Since the 1990s, four state-owned commercial banks have occupied 60-63 percent of the business of deposits and loans.
Most loans were extended to state-owned enterprises, especially large enterprises. According to 1998 statistics, the state-owned-bank loan balance for SMEs was only 1.7 trillion yuan, or 38 percent of their total loan balance. At the same time, the loan balance for city commercial banks and city and rural credit cooperatives was 600 billion yuan (80 percent of which was
45 Financing Difficulties and Structural Characteristics of SMEs in China
released to SMEs) (Chen Naixing, ed, 2002, p. 231). Although on the whole SMEs gained a certain amount of loans, due to the macro economic retrenchment starting from 1993, especially with the influence of the Asian financial crisis in 1997, the requirements for receiving loans became more strict and the formalities more complicated. For example, state-owned commercial banks only increase loans for enterprises with at least an “AA”rating. However, normally, it is difficult for SMEs to obtain an “AA” credit rating. Some state-owned commercial banks even stipulate that they will usually not consider an application for a loan below 3 million yuan. Since loan competence of state-owned commercial banks at county-level is fairly low, they often need up to three months to process a loan application, which has a deep influence on the SMEs that need capital immediately. Since state-owned bank branches at or below the county level lack an objective means to evaluate the operational conditions of SMEs, they would face deficits and successively withdraw
to the city (1,450 bank branches at or below the county level were closed in 2000). Although most SME loans are extended by state-owned commercial banks, few SMEs receive loans, and the banks obviously cannot meet the capital needs of SMEs. City and rural credit cooperatives should step in to meet SME capital needs. But because of capital limitations, their own structural problems, and an even higher ratio of non-performing loans (approximately 25 percent of the total) compared to state-owned commercial banks, the increase of loans they provide is small (25 billion yuan in 2002). Large discrepancies exist in loans for non-state-owned enterprises from various financial institutions in Guangzhou (Table 6). While RCCs are dynamic and active in providing loans to non-state-owned enterprises, the total amount is small. Joint-stock banks and state-owned commercial banks offer loans to non-state-owned enterprises of a certain scale, but the loan ratio is low. Generally speaking, China’s current financial system has originated from the highly
Table 6. Loans Provided to Non-State-Owned Enterprises by
Various Financial Institutions in the Guangzhou Municipality
(Jan.-Sept., 2002)
Loan Increment to Non-State-O w n e d E n t e r p r i s e s(100 million, RMB)Loans to Non-State-Owned Enterprises as a Proportion of Total Loans (%)
State-Owned Commercial Banks Joint-Stock Banks
City Commercial Banks
Rural Credit Cooperatives 629.06
366.81
3.47
87.19
21.5
28.5
18.5
42.39
Source: The Investigation Report on The Loan Conditions of Non-State-Owned Enterprises in Guangzhou, 2003, internal publication of Guangdong City Commercial Bank.
46Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
centralized banking system, which now lacks specialized small and medium-sized banks to provide financial services to SMEs. Therefore, it is very difficult for SMEs to obtain bank loans.
III. Countermeasures to the SME
Financing Difficulty
Small and medium-sized enterprises, on the whole, have bright prospects. However, due to individual enterprise’s weakness in scale and limitations in personnel, information, management and especially financing, the development of these enterprises does not go smoothly. Every year, many SMEs go bankrupt and the bankruptcy of SMEs within a period of three to five years is about 50 percent. This indicates that it is extremely hard for such enterprises to remain viable and seek development amid fierce market competition.
Compared to large firms, SMEs are at a disadvantage. To promote employment, economic development and social stability, preferential policies must be adopted to support SMEs.
Here, we will put forward some countermeasures in response to the problems discussed above.
(1) China should increase the overall volume and proportion of credit for SMEs in the
country’s financial assets, especially banking credit. China boasts a large volume of financial assets, which increases very rapidly. Although the capital market has seen a fast development, the various types of bank loans would remain, within a fairly long period of time, the principal source of credit.6 Currently, the scarcity of capital earmarked for small and medium-sized (particularly small) enterprises is the cause of the financial predicament that faces such businesses. Increasing the volume and ratio of credit for SMEs in China’s financial assets, especially banking credit capital, will help create a better external environment for solving SMEs financial difficulties. Proper measures should be taken to encourage financial institutions to raise the ratio of credit capital for small and medium-sized, especially small businesses, to a proper level. The role of special SME credit-service departments at state-owned commercial banks should be fully fulfilled. A more flexible interest rate floating regime should be adopted for credit extended to SMEs, and the inappropriate management system should be reformed.
(2) China should gradually develop specialized financial institutions to serve SMEs
and reform the current financial structure and management system. Although there are
6 In 2000 and 2001, bank loans accounted for 73.3 and 72.5 percent respectively of the overall credit of
financial institutions (NBS, 2002, p. 662).
Financing Difficulties and Structural Characteristics of SMEs in China
47
many reasons for SME financing difficulties, the lack of specialized financial institutions is undoubtedly a major one. Vigorously developing small and medium-sized financial institutions and establishing and improving China’s small and medium-sized financial-institution system should be a major initiative for solving the problem. The existing urban and rural credit cooperatives should be reformed so they can gradually develop into independent, non-state, small and medium-sized banks or other types of loan-granting financial institutions. They should be encouraged to compete with each other to motivate them to get in touch and ultimately establish a long-term and stable cooperation with SMEs, which will lead to less information asymmetry. Those financial institutions can include “small stock markets” (regional stock markets), “small banks” (regional shareholding banks initiated by non-state investors), small credit guarantee companies, small leasing companies and small finance companies. Developing non-state financial institutions not only serves as a supplement for the state financial institutional structure, but also solves the problem of financing difficulties faced by SMEs. To prevent financial risks, however, the regulation of non-state “small financial institutions” is very important.
(3) China should enrich the direct financing channels for SMEs so that the entrepreneurs of those businesses can choose relatively low-cost capital sources according to their unique commercial goals and product characteristics. The further growth of SMEs-oriented financial institutions, credit-guarantee institutions and the capital market, especially the growth and improvement of SME-oriented venture capital funds and second board markets, will add to the financing channels for those businesses.
It is advisable to draw from the managerial experiences of the second board market of developed countries. Meanwhile, SMEs should take advantage of their own institutional adjustment elasticity and flexibility to pool funds. In the process of development, such enterprises can pool capital by properly diversifying their shareholding structure. SMEs with promising projects, operational competency and a good reputation can successfully attract capital needed for their development on the capital market. Now that China has stepped out of the “shortage economy” period, a large quantity of social funds and financial resources are seeking investment channels. The financing environment for SMEs has improved remarkably.
(4) China should further improve the loan guarantee system for SMEs. The development
of the SME-oriented capital market can only partially solve the financing problem of the high-tech enterprises that can garner high returns while facing high risks, and the number
of such enterprises is limited. From a long-term perspective, China will remain a developing country that features relative capital (including physical capital and human capital) shortages and an abundance in labor. Developing labour-intensive SMEs is in line with the comparative
48Yanzhong Wang / 34-49, Vol. 12, No. 2, 2004
advantage of the Chinese economy. Such enterprises will always be the principal and most dynamic part of China’s SMEs. The earning ratio of labor-intensive enterprises and their growth prospects have determined that they are unsuitable for direct financing on the capital market. Therefore, we need to establish specialized loan-guarantee institutions for SMEs to solve their financial problems, where the government can play a prominent role.
Some loan-guarantee companies specializing in providing loan guarantees for SMEs have been gradually established across China. The China Development Bank has indirectly supported the development of SMEs by providing re-guarantees for loan-guarantee companies in Shanghai. In recent years, although China has made some headway in providing loan guarantees for SMEs, the guarantee procedures and management must be reformed in accordance with demand from SMEs.
(5) China should accelerate the fostering of a social-credit environment and the
establishment of an SME credit-rating system. China now remains at the initial stages of market economy, where insufficient market competition has led to many distortions in economic life. There is a lack of a comprehensive social-credit system and social notarisation mechanisms. The market economy is a credit-based economy and social credit is the intangible assets that an enterprise uses to get bank loans for their sustainable development. Therefore, enterprises should strengthen their credit awareness and establish a good credit relationship with banks, like paying back loans on time, so that a mutual respect can be established. To this end, we should accelerate the establishment of the SME commercial credit-rating system and the individual financial credit system. The collection and sharing of credit information should be promoted vigorously to provide a verifiable credit backup for loans granted to SME and individual venture projects.
(6) A comprehensive socialized support and service system for SMEs should be
gradually established. Helping SMEs develop is a systematic project which includes the SME legal guarantee system, organizational guarantee system, venture support and guidance system, financial service system, fiscal and taxation support system, export encouragement and support system, technological innovation support system, professional training and technical service system, and information and consultation system. The financing troubles for SMEs actually reflect the weaknesses of the whole social service system. A SME-oriented social service system should be established and improved. In supporting the development of SMEs, the government alone is far from enough. To create
a favourable external environment for SMEs, it must encourage the development of and
bring out the role of various social service institutions that provide consultations, training, technical and information services.
Financing Difficulties and Structural Characteristics of SMEs in China
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(Edited by Feng Xiaoming)