Worse Than 2008

Chinese SMEs should prepare for an even bumpier ride ahead By Lan Xinzhen

Worse Than 2008

Chinese SMEs should prepare for an even bumpier ride ahead By Lan Xinzhen

In 2012, Chinese enterprises will be confronted with unprecedented challenges,said the Report of Chinese Enterprise Development, issued by the Development Research Center (DRC) of the State Council on January 8.

The report pointed out that Chinese enterprises will face a more complicated development environment and the economic conditions could be less than friendly. They will be plagued by weak domestic and international demand, rising labor and raw material costs, land shortage, appreciating Chinese currency and increasing costs for environment protection. Those challenges have already put Chinese enterprises into a worse position than they were in when the fi nancial crisis broke out in 2008.

China’s economic growth has been decelerating in the past few years and will decrease even more this year. Out of concern over a hard landing, the Ministry of Industry and Information Technology (MIIT) researched a package of policies aimed at supporting small and medium-sized enterprises (SMEs). The favorable policies might include reducing tax burdens of SMEs, building up a public service platform for SMEs, and supporting the development of innovative, labor-intensive and hitech SMEs.

MIIT has named 2012 the “year of service” for SMEs.

Harsh environment

The report said the 2012 international and domestic economic environment might continue to put enormous restrictions on Chinese enterprises.

Li Wei, DRC Director, said that as stimulus policies are normalized, the deep-rooted con fl icts of enterprises have begun to emerge.Enterprises are faced with rising labor costs and the inability for them to keep employees from quitting their jobs in search of better pay. The fi nancing needs of SMEs cannot be met sufficiently, and worse still, they shoulder much higher financing costs than stateowned companies. Apart from the high credit interest, SMEs are burdened with numerous fees such as those for registration, evaluation, notarization, auditing, and industrial and commercial inquiry. Services provided by financial institutions cannot meet the needs of SMEs. Although they have been making headway in supporting SMEs fi nancially, the fi nancing time limit and the complicated procedures block many SMEs from borrowing.

Li said the east coastal area where the SMEs are most developed has the biggest problems, as many SMEs are in the red.

The report, based on forecasts and judgment of both international and domestic economic situations, noted 2012 might be the hardest time for Chinese enterprises in this century. The companies should re-examine their development strategies and mode, tap into the challenges and opportunities during the period, voluntarily make readjustments, raise management quality and effi ciency, strengthen innovation and branding, and cultivate core competitiveness.

Government measures

At the end of last year, MIIT launched a“serving-the-SMEs” campaign for 2012,aimed at creating a sound development atmosphere for SMEs and promoting the SME development by activating all social strengths.

Zhu Hongren, chief engineer of MIIT and director in charge of the SME development work under the State Council, recently hosted a meeting to execute the project.

Zhu said the MIIT will support innovative, labor-intensive and creative SMEs,especially small and micro-sized enterprises,further improve and carry out the supporting policies, strengthen guidance for SMEs, and improve services and the development environment for SMEs. The MIIT will continue to implement the existing favorable fi scal, tax and fi nancial policies for SMEs and introduce other policies to support the healthy development of SMEs. MIIT is now considering cutting SMEs’ tax burdens, pushing fi nancial institutions to give more credit support to SMEs, and set up credit re-guarantee institutions for SMEs in areas where conditions permit. Zhu said the government will further expand the fi nancing channels for SMEs, and encourage and support the construction of fi nancing service platforms. In the meantime,the SMEs are encouraged to transform their development patterns, and the government will focus on supporting the technology upgrading of SMEs.

According to Zhu, MIIT has set a preliminary target for the development of SMEs. During the 12th Five-Year Plan(2011-15) period, the number of registered SMEs should increase 8 percent year on year on average; the number of SMEs with relatively bigger operational revenue should increase by 6 percent year on year on average; and the value added of SMEs should reach 8 percent. In terms of technology innovation, the SMEs’ expenditure in research and business development should take up a considerable proportion of their revenue,and a number of innovative SMEs shall be given full support. In terms of industrial structure, the SMEs’ proportion in modern service industries, modern agriculture and hi-tech industries will rise signi fi cantly.

MIIT plans to establish or improve altogether 4,000 public service platforms in the next fi ve years, 500 of which will be state-level SME demonstration service platforms. It plans to build up a SME public service network covering 80 percent of the country, and SMEs can share their resources and services there.

Chinese enterprises will face a more complicated development environment,and the economic conditions could be less than friendly

Possible remedies

How should enterprises cope with the predicament ahead? Although some companies are plotting new routes to success, or at least stability, many are waiting passively for the environment to turn for the better. Li said the SMEs should transform their development model and upgrade their structures.

“Entrepreneurs must be prepared for an extraordinarily tough external environment.Instead of being pessimistic, they should take concrete actions to change their development pattern. Under current internal and external pressures, they should actively promote innovation and industrial restructuring and upgrading, and it is totally possible for them to survive the economic downturn,” Li said.

In spite of all the problems lying ahead on the road of development, China is still a vast market. Under conditions of insuf fi cient overseas demand, exploring the domestic market has become the top priority for SMEs.

It is nearly impossible for the SMEs to shrug off all the problems on their own, said Li. The government should give sufficient support to SMEs and further improve the development environment for them. Li suggested the government form a special work group to evaluate the market access standard for SMEs and revaluate the approval procedures. The government should loosen control over certain market access and approval procedures and cut unnecessary administrative fees.

Li said the government should increase fiscal and tax support for SMEs and suggested a stair-type tax system for small and micro-sized enterprises. The government should help SMEs for their technology innovation and industrial restructuring, support the invention of technologies that cater to the needs of SMEs and provide better management and technology consultant services for SMEs.