More than 80 percent of China’s SMEs are facing cash flow problems, according to a report issued by Fudan-Ping An Research Institute for Macroeconomy under Ping An Digital Economic Research Center and the School of Economics, Fudan University.
SMEs in China have always faced issues with financing, and the COVID-19 pandemic has only exacerbated that. According to the same report, Chinese SMEs’ revenue fell by 50 percent in the first quarter of 2020. SMEs in in education, accommodation and catering, cultural, sports and entertainment, and manufacturing are the worst affected.
Impact on the Chinese Economy
SMEs are crucial to the Chinese economy, contributing to 60 percent of GDP and providing 80 percent of employment. But the worldwide lockdown amidst the pandemic has had a huge impact on the global economy.
Although the purchasing managers’ index (PMI) showed an improvement in May, demand remains weak across the board. This indicates that while companies got back to work and cleared outstanding orders and the supply chain has steadied, many of China’s trading partners have yet to recover from lockdowns of their own.
The International Monetary Fund projects the global economy to shrink by 3 percent this year. In line with that, the report issued by Ping An also expects China’s GDP to shrink 1.5 to 3 percent this year – a 40-year low.
In the long run, with the pandemic and a growing trend for de-globalization, global trade may give way to intraregional trade, multilateral trade to bilateral trade, and international trade to domestic trade. China’s current and future macroeconomic performance will be dragged down mainly by global supply chain shocks and shrinking external demand.
Government Support for SMEs
The report also analysed more than 100 speeches delivered by the Chinese leadership and government work arrangements.
It finds the work of the Chinese government can be split into three stages:
- Ensuring the supply of medical devices and necessities are not disrupted when battling with the disease (before February 19)
- Lifting lockdown measures by risk levels (from Feb 19 to March 17)
- Coping with the global recession (after March 18)
A series of policies have been announced to help SMEs cope with the shock of COVID-19, namely financial support, tax and fee cuts, encouraging employment, and helping boost productivity. More than RMB6.03 trillion has been earmarked for financial support and tax and fee cut policies.
Despite the introduction of a series of financial support policies, small and medium-sized banks are facing the dual challenges of rising ratios of non-performing loans and narrowing net interest margins when they extend credit to SMEs.
As more than 70 percent of SMEs get their loans from small and medium-sized banks, whether the central government’s financial support policies can be fully implemented depends on the lending capacity of small and medium-sized banks.
Helping small and medium-sized banks to manage the loan credit risk of SMEs is the key to solve the financing problem of SMEs. The report also suggests banks utilize technologies including big data and AI to effectively regulate the use of loan funds.
