Chinese Journal Review: Covid-19 Takes Its Toll on China’s SMEs

On Monday, October 19, Chinese officials reported 4.9 percent GDP growth in the third quarter, driven largely by an uptick in exports, new infrastructure investments, and an increase in consumer spending.

As policy analysts consider the prospects for China’s longer-term recovery, however, many are paying attention to the health of the country’s small- and medium-sized enterprises (SMEs), which make up 60 percent of China’s GDP, generate 70 percent of its innovation, and employ 80 percent of the urban labor force. According to a Center for Global Development working paper published last month, between February and April, approximately 18 percent of China’s SMEs closed their doors for good, eliminating 14 percent of China’s total jobs. 

In early February, amid the peak of China’s Covid-19 outbreak, Chinese policymakers announced a swath of policies to stand up SMEs, including tax cuts, tax holidays, stimulus packages, loan extensions, subsidies, suspensions of administrative fees, and other supports.

Many of these policy supports likely did not provide help for SMEs quickly enough, however. According to a paper published in April by scholars affiliated with Tsinghua University and the Chinese Academy of Social Sciences (CASS) in the CASS-sponsored Management World journal, many of China’s SMEs did not know about these new government programs, benefits, or subsidies when they were announced, or did not know how to apply for them. 

As of this writing, the Tsinghua/CASS essay has been cited in 49 articles and downloaded 12,686 times, making it the most cited research published in Chinese academia in the social sciences/economics field this year, and the second most downloaded one. It was written by Zhu Wuxiang (朱武祥), Zhang Ping (张平), Li Pengfei (李鹏飞), and Wang Ziyang (王子阳).

According to the authors, who summarized survey results collected in mid-February from more than 500 SMEs, 59.2 percent of firms surveyed said that they did not receive any part of packages of benefits announced in early February designed to reduce the costs of operating their businesses, such as refunds of unemployment insurance payments. And 73.8 percent of firms said that they did not receive promised tax benefits, either, such as exemptions or reductions in real estate tax, land use tax, income tax, or value added taxes.

Delays in rolling out these government support programs likely had big impacts on SMEs’ abilities to withstand the Covid-19 economic crisis. In an earlier survey conducted by the same researchers in early February of more than 1,500 SMEs, 37 percent of firms surveyed reported that they had less than one month of cash on hand to pay for operating expenses while 85.8 percent of SMEs had enough cash on hand to pay for three months of operating expenses. Just eight percent of firms had enough cash on hand to pay for 6 months of operating expenses.

The researchers attributed delays in getting financial supports to SMEs to a number of factors, including: poorly designed government websites (which made it difficult for SMEs to apply for benefits); weak government-to-SME networks (the government does not have a good way to easily communicate with microenterprises, for example); low literacy levels among SMEs, especially very small SMEs, about government services, and; overwhelmed government officials who could not process claims quickly enough. Many government officials were quarantined during this period and unable to work from home.

The authors also reported the following:

• As a result of the global pandemic, 59.1 percent of surveyed SMEs anticipated a drop in income in 2020 of more than 20 percent; 31.9 percent anticipated a drop in revenue of more than 31.9 percent.

• The pandemic would take its greatest economic toll on small firms.  Among those companies that anticipated a drop in revenue of more than 50 percent, 70 percent of those firms had less than 10 million RMB operating income (~$1.49 million USD).

• SMEs would react to the crisis differently depending on their size. Whereas 48.54 percent of firms that employed more than 1,000 people said that they would likely try to obtain loans to pay for cash shortfalls, just 32.1 percent of smaller firms said that they would do the same, and that they would instead suspend operations or lay off employees.

• By mid-February, 57.6 percent of SMEs had not returned to work. Among SMEs with 50 or fewer employees, 70.9 percent had not returned to work. The most common reason cited was supply chain disruptions, either because raw materials orders could not be fulfilled or because customers cancelled their orders. 42 percent of SMEs were worried about potential legal liability if an employee contracted Covid-19 as a result of reopening.

The writers concluded their paper with recommendations for policymakers to reduce delays and to provide greater supports for SMEs:

1. Given that many traditional lenders are unwilling to provide credit during economic shocks, the government should create new vehicles to provide cash for equity (not debt) to help stand up SMEs.

2. The government should also partner with third party firms that specialize in microfinance like Ant Financial, Xinwang Bank, and WeBank to more efficiently direct financing to small firms and micro-enterprises.

3. The government should also improve online services available to SMEs, including the creation of a one-stop “green channel” website that quickly gives SMEs the ability to apply for the range of benefits available to them via one location.

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