Chinese SMEs Gaining Momentum

With the decisive support of Beijing’s leadership, China’s economic reforms are spreading to one of the most critical sectors of employment – the small-and-medium size enterprises (SMEs).

China is not known for its resilient small-and-medium-size enterprises (SMEs), as of yet. And still, in August, the SMEs’ PMI figure, which serves as an important indicator of the manufacturing sector, suggests that China’s internal economic growth is gaining momentum. It surpassed the 50 threshold for the first time since April 2012.

These gains reflect a strong policy momentum by the central government to boost the role of the SMEs in the Chinese economy.

Recently, Premier Li Keqiang noted that 1.7 million businesses were registered nationwide in the first half of the ongoing year, up almost 60 percent year-on-year. Among them, almost 1.6 million were private businesses, which provided nearly 10.1 million jobs.

Li’s message to the symposium on small-and-medium size enterprises (SMEs) in Jinan, Shangdong, was clear: It is a great start. But much more remains to be done.

Unlike their predecessors, the new Chinese leadership knows only too well that SMEs are the true growth engine in most economies.

SME financing, the most immediate challenge

Ever since the leadership transition, Premier Li and his reformers have paid increasing attention to the Chinese business environment, SMEs and entrepreneurship.

In fall 2013, the launch of the Shanghai Free Trade Zone (FTZ) allowed SMEs in Shanghai to enjoy a wider range of opportunities to upgrade and transform their industrial structures.

In the past, many of these SMEs have been labor-intensive focusing on manufacturing. In the future, they hope to become more capital-intensive focusing on product quality and design.

But the Shanghai FTZ is just one initiative in the broad front of economic reforms that are creating new momentum across the mainland.

In late July, Premier Li criticized banks for only issuing large loans to big businesses. In turn, the State Council noted that many small Chinese companies continue to face financing challenges, which could fuel risk in the economy.

Perceptions matter

The struggle for the SMEs is something new in the Chinese economy. Until the global crisis of 2008/9, many Chinese graduates were still eager to find work in the private sector, particularly foreign multinationals.

In the past half a decade, these jobs have steadily lost their appeal amidst heavy layoffs and salary cuts. Reportedly, half of Chinese graduates now hope to land a job at a state-owned enterprise (SOE).

The real story, of course, is not that job preferences have migrated from the private sector to the public sector, but that SMEs continue to be seen as less attractive.

But what is the role of the Chinese business environment, SMEs and entrepreneurship internationally?

Upgrading SMEs and entrepreneurship

The World Bank’s Doing Business Report measures the costs to firms of business regulations worldwide. The best performers feature Asia’s tiger economies, such as Singapore (1), Hong Kong (2), Malaysia (6), and South Korea (7). The top-performers also include the US (4), the UK (10), Australia (11), and the small Nordics.

Interestingly, Russia (92) leads among the BRIC economies, but it is followed by China (96), Brazil (116) and India (134). China has steadily improved its position.  However, taking into consideration the fact that China ranks 29th in the World Economic Forum’s Global Competitiveness Report, but only 96th in the Doing Business Report, much remains to improve and upgrade in the Chinese business environment.

How entrepreneurial is China?

According to the Global Entrepreneurship Monitor (GEM), Chinese companies see themselves as close to average in “perceived opportunities” and “entrepreneurial intentions.” Conversely, Chinese companies perceive themselves as significantly weaker than average in their “fear of failure,” “entrepreneurship as a good career choice,” and “high status to successful entrepreneurs.”

These characteristics are not unique to China. Historically, such results have been typical to many industrializing economies, in which the state has played a significant role, such as the French dirigisme, German planning, and Japanese developmentalism. Typically, these nations have all gradually moved toward greater liberalization, including German Mittelstand companies, the privatization of the French SOEs and Shinzo Abe’s proposed structural reforms in Japan.

SMEs are the true growth engines

While popular perceptions of Chinese entrepreneurship still tend to be low both domestically and internationally, there is no reason why Chinese SMEs could not thrive. The role of Chinese SMEs is already strong in exports.

By the early 2010s, foreign multinationals and Chinese SOEs still accounted for 55 percent and 15 percent, respectively, of total exports. At the same time, the role of SMEs was already over 30 percent of the total.

In some ways, these SMEs may be actually better-positioned to succeed than their counterparts in other regions – given the world’s largest marketplace, advanced infrastructure, the presence of highly competitive foreign multinationals and an upgraded business environment.

In order to realize its full potential, China needs to boost its SMEs including micro firms. Typically, SMEs employ more people than large capital-intensive corporations. In China, innovation has taken off in foreign multinationals and Chinese SOEs, but over time it is likely to accelerate in Chinese SMEs.

It is the SMEs that make or break national economies and individual dreams. In order to realize the Chinese dream, China needs a thriving SME sector.

The original version of the commentary was published by South China Morning Post on August 18, 2014