Levelling the playing field for SMEs in China: European Chamber’s recommendations included in revised China SME Promotion Act

SME alphabetFirst coming into effect in 2003, the SME Promotion Act underwent a recent revision in late 2016. The Chamber’s InterChamber SME Working Group took this opportunity to proactively feed into the revision process, providing recommendations taken from its position paper. 

This positive advocacy approach resulted in all four of the recommendations being included in the revised draft, which could go a long way to levelling the playing field for SMEs operating in China.

Status quo, economic significance and policy developments

Like in other major world economies, small and medium-sized enterprises (SMEs) now make up the overwhelming majority of businesses in the Chinese economy. According to data released by the National People’s Congress (NPC) Fiscal and Economic Committee, by the end of 2015, the total number of businesses registered with the State Administration for Industry and Commerce (SAIC) reached 21. 86 million, the majority of which were SMEs. Significantly, SMEs accounted for 99.6 per cent of businesses in the industrial sector.

Their contribution to economic growth, job creation and innovation has been increasingly recognised by Chinese policymakers. During a press conference at the Third Session of the 12th People’s Political Consultative Conference National Committee in 2015, Mr Lv Xinhua highlighted the importance of SMEs. He stated that SMEs contribute to over 65 per cent of GDP, 75 per cent of employment and 50 per cent of tax revenues. Over the 12th Five-Year Plan period, he said, registration of SMEs’ intellectual property rights achieved 53 per cent growth year-to-year.

In acknowledgment of the crucial role played by SMEs, policymakers are making greater efforts to identify the key challenges that they face, with the goal of creating a more favourable policy environment for them. In the 2015/2016 Blue Book on the Development of SMEs in China, the Ministry of Industry and Information Technology (MIIT) discussed some of the most prominent obstacles hindering their development and also laid out some opportunities that can arise from recent, positive policy developments.

Obstacles to SME development
Unfair competitive environment Compared to large businesses:

žMore restricted market access

žGreater difficulties in key economic resources

Lack of channels for talent acquisition žMismatch between the skills supplied by China’s education system and those demanded by SMEs
Lack of affordable channels for financing žLimited access to direct financing (venture capital, debt and equity financing)

ž Cumbersome and expensive indirect financing

Burdensome public finance system ž Heavy tax and social security contributions

ž Opaque system of fees and administrative charges

Weak capacity building žLow mobility out of traditional industries in decline

žDwindling profitability from the traditional business model of low quality, low technology and low price


Positive policy developments and their implications
Internet+ žFacilitate the improvement of production efficiency

žContribute to the construction of a coherent credit evaluation system by leveraging Big Data

žPromote affordable Internet financing

Road and Belt Initiative žAct as a vehicle for SME internationalisation

žProvide a wider range of financial products for SMEs in internationalisation

China Manufacturing 2025 žPromotes clustering

žPromotes differentiation in terms of business models, products and technologies

Revision of the SME Promotion Act and Chamber Advocacy

The SME Promotion Act first came into effect in 2003, with the objective of ensuring a fair and healthy legal, policy and market environment for the development of Chinese SMEs. After more than a decade, its inadequacy to serve the stated objective has become increasingly obvious, reflected in particular by its failure to keep up with the new challenges facing SMEs and by its weak enforceability.

To address these problems, the NPC initiated the revision of the SME Promotion Act in October 2016, followed by a month-long public consultation starting mid-November.

Over the years, through dialogues with both Chinese and European SMEs and other stakeholders, the European Chamber identified a number of common difficulties and obstacles that affect Chinese and European SMEs alike. The Chamber was also aware that Chinese lawmakers and policymakers have long been looking to economies with more developed legal and policy frameworks for input on how to promote the development of SMEs. With this in mind, the Chamber reached out to the key SME policymaker—the MIIT SME Bureau—which also acts as a key advisory body for the NPC Legislative Affairs Committee (LAC) for the development of the SME Promotion Act.

The Inter-Chamber SME Working Group shared EU experience in protecting and helping SMEs. In September 2016, the latest Position Paper had been presented to both the director general of the MIIT SME Bureau and its research coordinator. The working group had also been enhancing its visibility among Chinese authorities by becoming actively involved in initiatives and activities organised by the MIIT SME Bureau.

In October 2016, the NPC LAC began revising the SME Promotion Act. The Inter-Chamber SME Working Group reacted by providing business recommendations via the call for comments and during official meetings with the MIIT SME Bureau and other relevant experts and officials. The working group’s recommendations related to access to finance, burdensome administrative work, late payment issues and IPR protection were all incorporated. The following table provides a comparison between the working group’s recommendations and how they appear in the revised draft of the SME Promotion Act:

Key recommendations (KRs) from the Working Group Position Paper 2016/17 Chapters and articles in the first revised draft of the SME Promotion Act
KR 1 – better access to financing Chapter 3 – SME financing promotion
ŸImplement key performance indicators (KPIs) to encourage banks to issue loans to SMEs. ŸArticle 15 demands that banking regulators devise dedicated supervision policies for SME banking services and encourage bank financing for SMEs.

ŸArticle 17 encourages banks to set up specialised entities to provide dedicated SME financial services.

ŸDevelop focused credit risk assessment procedures/systems suitable for the provision of SME loans. ŸArticle 24 encourages credit rating agencies to develop SME-focused credit evaluation services and encourages the set-up of third-party independent SME credit rating agencies.
KR 2 – simplifying regulatory and administrative requirements for SMEs Chapter 8 SME Rights Protection
ŸFurther develop official platforms to provide comprehensive and coherent information to SMEs. ŸArticle 25 requires government bodies at and above the county level to provide free legal and policy consulting and public information services to SMEs regarding administrative, taxation, financing, hiring, production safety and social security.
ŸAlleviate the administrative burdens for SMEs by reducing government approvals and simplifying the remaining approval and filing procedures. ŸArticle 27 requires the State to optimise administrative approval procedures and facilitate the acquisition of licences and permits for small and micro businesses

ŸArticle 30 requires the State to simplify the procedure for cancelling registration to facilitate the exit of small and micro businesses.

KR 3 – tackling late payments Chapter 8 SME Rights Protection
ŸIssue guidelines to ensure that government and state-associated institutions (incl. SOEs) respect contractual payment terms. ŸArticle 53 prohibits the violation of contractual payment terms and payment deferrals by government bodies and large businesses and lays out the procedure for SMEs seeking rights protection.

Looking forward

The Inter-Chamber SME Working Group believes that the revision of the SME Promotion Act will have far-reaching implications on SME development and hopes that it will contribute towards positively strengthening SME competitiveness and their presence along the global value chain.

As the most fundamental law for protecting and helping SMEs, the act will serve to guide more concrete legislative and policymaking efforts of government bodies at all levels. It is likely that over the coming years we will see a wave of pertinent laws, regulations and policies coming out in the spirit of the SME Promotion Act.

Providing SMEs with a well-designed legal and policy framework that stands in when the market fails to allow the full potential of SMEs will be crucial for the sustainable growth of the Chinese economy. The Inter-Chamber SME Working Group remains committed to continuing to contribute to the improvement of the Chinese market and policy environment for European and Chinese SMEs alike.

The Inter-Chamber SME Working Group is the advocacy platform of the EU SME Centre, which focuses on helping European SMEs dealing with the challenges and difficulties related to the China market. The Inter-Chamber SME Working Group is a joint SME community from six European chambers of commerce: the China-Britain Business Council, the Benelux Chamber of Commerce in China, the China – Italy Chamber of Commerce, the French Chamber of Commerce in China, the European Union Chamber of Commerce in China and EUROCHAMBRES.

The European Union Chamber of Commerce is the leading chamber on policy advocacy. We carry out quarterly working group meetings, policy meetings and seminars, involving stakeholders from different chambers of commerce, the European Union Delegation to China and the 28 European Union member embassies in Beijing. From 2015 to 2016, the European Chamber has represented Inter-Chamber SME Working Group at the 6th and 7th EU-China SME Policy Dialogue, the EU-China Industrial Dialogue, the APEC Vietnam Workshop and the B20 Hangzhou Summit.

For information, please contact Deputy Head of Government Affairs Xavier Sans-Powell.