The current policy environment for small and medium-sized enterprises
In recent years, the policy environment for small and medium-sized enterprises (SMEs) in China has undergone a significant transformation. The European Union (EU) SME Centre recently released a report to provide an overview of the most significant developments affecting SMEs operating in the country. This article by Susana Xu of the EU SME Centre will provide you with a synopsis of their findings.
SMEs constitute an overwhelming majority of the enterprises in China and are key to its economic development. Around 50 per cent of the nation’s tax revenue and 60 per cent of its gross domestic product (GDP) come from SMEs. Small businesses are also responsible for 70 per cent of technology innovation and 80 per cent of urban employment in China. European SMEs operating in China play their part in contributing to those indicators.
However, European SMEs continue to encounter difficulties while conducting business in China. According to the European Chamber’s European Business in China Business Confidence Survey 2021 (BCS 2021), the most significant of these challenges are: information and support networks; access to financing; administrative and financial burden; talent acquisition and retention; and shortages of key technologies and skills.
Impact of pandemic
As can be expected, a major challenge for SMEs in 2020 was the impact of the COVID-19 outbreak, the subsequent lockdown and travel restrictions. The BCS 2021 indicated why SMEs were particularly hit hard by the pandemic – due to their nature, they usually have fewer financial resources, are heavily reliant on steady business, and therefore were vulnerable to the disruption of business networks, supply chains and human resources.
Measures to reduce the administrative and financial burden of SMEs were particularly important in helping them to weather the pandemic. As the scale of the outbreak became clear in early 2020, the government issued approximately 600 policies aimed at reducing the financial and administrative challenges facing SMEs. These measures included tax relief, postponement of loan repayments, and cuts in rent and insurance costs. While these eased pressure somewhat, China Association for SMEs’ (CASME) SME Development Index (SMEDI) data from the second quarter of 2021 showed that figures are still not back to 2019 levels, which indicates that the sector needs further support.
Therefore, in terms of financial support, the Government Work Report 2021 announced that preferential tax policies for SMEs would be extended. In addition, banks and financial institutions were instructed to increase their loans to micro and SMEs by 30 per cent. Access to financing has always been an issue for SMEs in China, as banks traditionally prefer to fund state-owned enterprises (SOEs), which—due to their support by the government—are considered a safe bet.
Alternative forms of financing could potentially help ease the financing difficulties of SMEs. This is becoming more feasible, considering the major changes the fintech sector in China has undergone, from mainly engaging in peer-to-peer lending to leveraging fintech to reduce financing costs. The newly emerging blockchain technology is another promising solution.
In recent years there has been significant progress in areas like reducing administrative charges, dealing with construction permits, getting electricity, and resolving insolvency, as well as simplifying tax declarations. However, the SME Development Environment Assessment Report 2020 shows that the implementation of SME policies is not uniform across provinces, with a huge gap between the best (Shanghai, Shenzhen and Nanjing) and the worst performers (Urumqi, Haikou and Lhasa). Regarding the latter, looking at the link between administrative procedures and market access, 12 per cent of SME respondents to the BCS 2021 reported encountering direct barriers, such as negative lists, while a third indicated that they face indirect barriers, such as access to licensing, or administrative approval processes that are complex and time-consuming. In the case of SMEs, long approval processes may create additional costs, such as the payment of office rental while licence applications are pending. Furthermore, the COVID-19 outbreak, which left many SME legal representatives stranded abroad, highlighted the need to digitalise certain administrative procedures that require the physical presence of a legal signatory.
The policy environment for SMEs in China has transformed significantly in recent years, with progress in key areas from access to financing to reduction of administrative and financial burdens. In the meantime, China’s push for innovation and entrepreneurship has led to a steady improvement in intellectual property rights enforcement. However, SMEs—and in particular European SMEs—still face considerable obstacles that hinder their healthy development in the Chinese market. Some of these challenges stem from discriminatory regulations (such as public procurement), while others (like financing) are the consequence of insufficient encouragement by authorities, and the lack of bilateral or multilateral coordination. Above all, the heavy blow the outbreak of the pandemic has dealt to SMEs’ business operations throughout 2020 and 2021 still has a lasting impact on their ability to grow.
Therefore, there is still a need for further policies to support the development of SMEs in CHina – both domestic and foreign. Looking to the future, it will be important that the 14FYP for SME Development and its accompanying regulations include commitments to improve the business environment for small enterprises, and to support SME development in the context of strengthening China’s middle-income population.
The EU SME Centre is an EU initiative that provides a comprehensive range of hands-on support services to European SMEs, getting them ready to do business in China. Our team of experts provides advice and support in four areas – business development, law, standards and conformity, and human resources. Collaborating with external experts worldwide, the Centre converts valuable knowledge and experience into practical business tools and services easily accessible online.
 Ma, Si, Small firms recovering steadily, China Daily, 2nd June 2021, viewed 16th June 2021, <https://www.chinadaily.com.cn/a/202106/02/WS60b6de27a31024ad0bac2fb0.html>
 Government Work Report, State Council, 12th March 2021, viewed 14th April 2021 <http://www.gov.cn/premier/2021-03/12/content_5592671.htm>
 Fintech creates better environment for SMEs, China Daily, 23rd September 2020, viewed 31st May 2021, <https://www.chinadaily.com.cn/a/202009/23/WS5f6ab083a31024ad0ba7b366.html>
 Isler, Renzo. Blockchain and SME Financing, 8th December 2020, viewed 17th June 2021, <https://www.eurobiz.com.cn/blockchain-and-sme-financing>
 SME Development Environment Assessment Report 2020, China Centre for Promotion of SME Development, 31st March 2021, viewed 17th June 2021, <https://www.miit.gov.cn/jgsj/qyj/zcfg/art/2021/art_6d9b19918def4480bbb60d67acca484d.html>
 European Business in China Business Confidence Survey 2021, European Union Chamber of Commerce in China, 8th June 2021, <https://www.europeanchamber.com.cn/en/publications-business-confidence-survey>