Small and medium enterprises (SMEs) are the driving forces for Chinas economic growth. Since the economic reforms allowed private enterprises to enter the Chinese market, the growth of the SMEsand their significance for the economy continues to grow. In the following article, we will give you an overview of the current situation for SMEs in China, the challenges, and opportunities.
While the last 25 years most of the existing SMEs has been founded. Since the economic opening of China in the 1980s, SMEs were finally seen as vital for the economy and could start a business. Today, the SMEs are essential for the Chinese economy, they currently make up about 97% of all enterprises in China.
Definition of SMEs
In most OECD economies, an SME is defined through its number of employees. Normally the number is fewer than 100 employees or 500 employees. By contrast, the definition of an SME in China is much more complex. The categorizing is based on the SME Promotion Law of China, which was published in 2003. The classification depends on the industry category in terms of the number of employees, their sales, and assets.
The following table gives an overview of the exact classification of a small or medium company. Special criteria appear for wholesale, retail, transport, post and hotel & restaurant.
Although the considered SMEs in China are quite big relative to Europe or the United States, in consideration of the labor intensity of the production and the huge size of China, the companies are relatively small.
Within the last 30 years, China’s economy and its economic structure have fundamentally changed. From 1998 to 2003 nearly 19 million workers laid-off from their state-owned enterprises (SOEs) and got reemployed at SMEs.
Since the opening of the market in the 1980s, the number of SMEs in China is rapidly growing. Already in the 1990s, there were more than 1 million private SMEs in China. 10 years later, the number grew so high, that China had more SMEs than Europe and the United States combined. According to Chinas Bureau of Statistics (CBS), the number of SMEs rose to over 40 Million in 2004. To put this into perspective, the number of SMEs in Europe in 2003 has been about 19 Million.
According to the China Statistical Yearbook, in 2015 SMEs made up about 97.9% of all registered companies in China. Their total assets have been around 53.4% of Chinas total number, their revenue was 62% of the total and the profits been 64.3% of the total with a number of 4.26 Billion Yuan. They also contributed nearly 58 percent of the GDP and 68 percent of exports.
SMEs are also playing an increasingly significant role in the employment situation in China. The number of employees in SMEs makes about 82% of total employees in China. They are also responsible for nearly 75% of the new jobs every year.
Despite the slowing growth of Chinas economic, the SMEs still reported growing net profits in 2016. The listed SMEs in the National Equities Exchange and Quotations (NEEQ) system net profits rose about 26.29% in 2016, furthermore, their annual reports reported an increase over 25% of the annual business revenue. The total assets also expanded about 23.9%. The SMEs also increased their expenses for research and development for about 8.25% to a total number of 11.58 billion RMB.
In total it can be said, that Chinas SMEs are still growing rapidly and there is still no end in sight.
Although SMEs have such a big importance for Chinas economy, there are still some problems when it comes to financing. According to China Enterprise Survey System data, more than 40 percent of the surveyed enterprises had troubles with underfunding. About 66 percent of recent SMEs had problems to access bank finance. In 2013 only 23.2% of bank loans were given to SMEs. The access to short-term capital loans is even harder, only 4.7% were extended so SMEs. The credit assets of state institutions are composed of loans mostly allocated to SOEs and big companies.
According to a survey of the HKUST IEMS in 2015 the lack of bank finance for SMEs can be attributed to the fact, that the banking system privileges lending loans to SOEs rather than to the private sector.
This has several reasons. To completely understand the lack of finance, there are two sides that have to be considered.
Economic theory suggests that credit market failure, attributed to information asymmetries, is the key reason for the lack of finance for SMEs. Lenders often have a lack of full information about the borrowers. Because they aren’t perfectly informed about the enterprises and their proposals, it can lead to insufficient credit availability and incorrect loan application evaluations according to standards of creditworthiness. Especially enterprises in the early stages of development have a higher lack in formal corporate structures, fixed asset as collateral and their ownership and their financial structures can seem to be non-transparent.
The other main reason is China’s financial system. The high market share of state-owned commercial banks, interest rate controls, insufficient development of the capital market and restriction on cross-border capital transaction lead to a lack of financing for SMEs. Because the government owned financial institutions are designed to facilitate a national economic development, only small parts of the loans can be contributed to SMEs. But ideological and political sensitivity are playing a big part, too. Using party-state resources to support capitalist ventures might be seen as unfair.
Due to the fact that undertaking financial support from banking sources is difficult, most SMEs finance their business with non-banking sources. In the mid-1990s and 2000, 2/3 of all SMEs relied on informal finance.
In China, informal finance isn’t necessarily illegal. It is a “quasi-regulated” sector. As informal finance count financial institutions that are not supervised by the Central Banking Regulatory Commission (CBRC). These finance institutes are registered as local branches of other bureaucracies. The main difference between banks and Non-banking-financial-institutions (NBFI) is, that the NBFI are not permitted to accept deposits. According to the CBRC, only banking entities with financial licenses are permitted to mobilize deposits from the public and financial institutions are not permitted to charge interest rates more than four times the benchmark lending rate set by the PBOC.
Below you can find a list of the most common NBFIs and their registration authority, as well as the number of registered companies.
Although getting financial support from local banks can be tricky, setting up an SME provides some chances of success. Like in every other business, there are some key sectors that will mostly grant you investment success.
According to an articleof the EURObiz the three top trends for SMEs in China are as following:
- China’s industrial sector tries to move up the value chain and strengthen their manufacturing. They’re still looking for new opportunities to automatize and modify their supply chains to be more efficient. Especially industry robotics, machine tools, transportation equipment, as well as agriculture equipment give a high chance for successful investment. Next to materials, know how especially manufacturing technology is highly demanded.
- The second trend is the rising domestic consumption. With the growth of Chinas middle class, their demand for European products also rises. Chinese consumers especially have an interest in luxury products. In this time European companies settled in China should be aware of offering different selling channels, including e-commerce.
- The third trend is rising Chinese outbound investment. Year on year, more Chinese investors try to invest in other countries and economies. Best for SMEs is providing services, such as financial services, specialist management consulting or private equity to the venture companies and keep on building contacts, though they can me most useful for the own business in China.
ECOVIS Beijing is a tax & legal consulting firm and part of ECOVIS International a worldwide network of internationally active consulting firms, specialized on accounting, audit, tax and legal advisory for SME, with more than 6,000 people in over 60 countries. If you have further questions please don’t hesitate to contact us: email@example.com
Richard Hoffmann is a partner at ECOVIS Beijing China. Richard obtained an honors degree in law and worked in Germany, the United States, and China for various prestigious law firms prior to joining ECOVIS. In addition to being a member of the board of ECOVIS International, he is Supervisor for the China business of a respected German company and shares his extensive knowledge to students by teaching commercial law in China at SRH Hochschule Heidelberg. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV stations. Contact: firstname.lastname@example.org
Ecovis Beijing is the trusted tax and legal advisor to several embassies and official institutions in China. It specializes in mid-sized international companies and is focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up for our Newsletter, give us a call +86 10-65616609 or contact us directly via email@example.com.