SME Development in China

Xu Zhong
PBC, June 2010

The views expressed in this paper are the views of the author(s) and do not necessarily reflect the views
or policies of the Asian Development Bank (ADB), or its Board of Directors or the governments they
represent. ADB does not guarantee the source, originality, accuracy, completeness or reliability of any
statement, information, data, finding, interpretation, advice, opinion, or view presented, nor does it make
any representation concerning the same.
 Main Messages
• SME development is at the core of China’s
economic transformation and of avoiding trap
of middle-income
• Main impediments for SMEs in China
– Gov’t vs. market
– Finance

• Promoting polices for SME development lack

clear target and matching implementation
measures, and the approach is still provision
of money yet not mechanism
 Main Messages
• Policy suggestions
– The key to develop SME is to provide an
enabling environment

• Analysis based on a 2009 survey in 8

provinces
SMEs: Key to future development
• Core of China’s economic transformation
– Urbanization
– Low carbon-development
– Employment
– Income distribution
– Balanced development among three industries
– Nurture middle-income class
Main impediments

• Gov’t vs. market

– Especially in western region: gov’t focus on
large-scale enterprises, and the environment
for SMEs is less favorable
– Although some preferable tax treatments,
local gov’t imposes high fees

• Finance
Main impediments

• Finance
– Lack of eligible collateral
– Large financial institutions focus on large
projects/enterprises
– Lack of small-sized financial institutions, or
privately owned financial institution
Promoting policies

• Main policies for SMEs

– SME promotion law
– Various policy announcements
• Tax reduction
• Lower entry criteria
• Guarantee companies
Promoting policies

• Issues

– Lack clear target and matching

implementation measures

– Provision of money yet not mechanism

Policies Recommendations

• An enabling environment
Enterprises by scale
Criteria

Large Medium Small

Employees >2000 300-2000 ≤300

Sales >300 30-300 ≤30

Assets >400 40-400 ≤40

(CNY million)
Enterprises by scale

Enterprises surveyed

Total Large Medium Small

2025 286 844 882
Impacts of Gov’t vs. Market

Fund

Large SM Large / SM/

Total
/East /East West West
Significant 58.07% 50.21% 51.32% 67.44% 74.68%
Some 33.78% 38.68% 38.87% 30.23% 21.34%
Small 5.83% 7.82% 6.91% 2.33% 2.89%
Minimum 2.32% 3.29% 2.90% 0.00% 0.90%
 Impacts of Gov’t vs. Market

Human Resource

Large SM Large / SM/

Total
/East /East West West
Significant 41.63% 46.50% 38.28% 65.12% 45.03%
Some 49.43% 46.50% 51.75% 30.23% 47.02%
Small 6.81% 5.35% 7.67% 2.33% 5.79%
Minimum 1.98% 1.23% 2.13% 2.33% 1.99%
Impacts of Gov’t vs. Market

Market

Large SM Large / SM/

Total
/East /East West West
Significant 65.14% 65.02% 61.72% 81.40% 71.25%
Some 28.20% 28.40% 30.69% 16.28% 23.69%
Small 4.64% 4.94% 5.46% 2.33% 2.71%
Minimum 1.88% 1.23% 1.96% 0.00% 2.17%
 Impacts of Gov’t vs. Market

Technology

Large SM Large / SM/

Total
/East /East West West
Significant 44.30% 47.33% 41.01% 51.16% 49.37%
Some 43.11% 41.15% 46.29% 41.86% 37.25%
Small 8.69% 7.41% 9.04% 4.65% 8.68%
Minimum 3.80% 3.29% 3.67% 2.33% 4.52%
Impacts of Gov’t vs. Market

Land

Large SM Large / SM/

Total
/East /East West West
Significant 14.02% 12.76% 12.96% 11.63% 17.00%
Some 43.01% 47.33% 43.39% 37.21% 40.51%
Small 28.25% 26.34% 29.07% 34.88% 26.94%
Minimum 14.47% 12.76% 14.32% 16.28% 15.37%
 Impacts of Gov’t vs. Market
Infra (energy, transport, etc.)

Large SM Large / SM/

Total
/East /East West West
Significant 17.53% 16.05% 14.07% 27.91% 24.41%
Some 51.16% 50.62% 51.83% 58.14% 49.19%
Small 21.93% 22.22% 23.27% 13.95% 19.71%
Minimum 9.14% 9.88% 10.66% 0.00% 6.51%
Impacts of Gov’t vs. Market
Gov’t support

Large SM Large / SM/

Total
/East /East West West
Significant 33.14% 30.04% 28.73% 41.86% 42.68%
Some 49.83% 53.50% 52.09% 48.84% 43.76%
Small 11.46% 8.64% 13.81% 6.98% 8.14%
Minimum 5.23% 7.00% 5.12% 2.33% 4.88%
 Impacts of Gov’t vs. Market
Property right protection

Large SM Large / SM/

Total
/East /East West West
Significant 20.00% 22.22% 18.07% 20.93% 22.78%
Some 45.68% 49.79% 47.14% 46.51% 41.05%
Small 21.73% 18.11% 23.36% 30.23% 18.63%
Minimum 12.00% 8.64% 10.91% 2.33% 16.82%
Financial Environment and SME Development
in China

• Lending Authority of county level financial institutions

2001 2002 2003 2004
RMB 10,000
Collateralized loan 1102 1171 1268 1148

Guaranteed loan 223 196 158 181

Credit Loan 0 0 0 0
 Financial Environment and SME Development
in China

• Approval authority of Lending

2001 2002 2003 2004
%
By upper level branches 53.6 52.2 51.0 53.1

By county level branches 27.8 28.4 29.1 28.7

By grass-root level branches 19.7 20.3 19.5 19.0

Financial Environment and SME Development
in China
Responsibility of Loan Performance
Chief Life-time Performance
responsibility responsibility salary of
person system system credit officers
No of Fin. Inst. 50 48 50
No 2 12 18
Yes 48 36 32
Starting time
1994 0 0 1
1995 1 1 1
1996 1 1 1
1997 3 3 3
1998 7 3 2
1999 12 10 7
2000 15 10 9
2001 5 3 5
2002 1 1 0
2003 1 3 2
2004 1 1 2
2005 1 1 1
Financial Environment and SME Development
in China
Loan Structure

100%
90%
80%
Others
70%
Private
60%
Collective
50%
SOE
40%
30%
20%
10%
0%
1996 1997 1998 1999 2000 2001 2002 2003 2004