n November 22, China’s State Council announced it had issued a circular on strengthening support for small- and medium-sized enterprises (SMEs). This came after Chinese Premier Li Keqiang repeatedly said that China needs to lower fees and taxes for SMEs.
China’s GDP growth was unexpectedly low at 4.9 percent in the third quarter, down from 7.9 percent in the second quarter and 18.3 percent in the first quarter. The reemergence of Covid-19 outbreaks led by the Delta variant, floods, a power crunch and a cooling property market have all weighed on growth.
These challenges inflict an outsized impact on China’s SMEs, which are struggling with supply chain disruptions, high rawmaterial costs and power crises. While the export sector remains robust, the profit margins of many SMEs are squeezed by increased costs in logistics, labor and raw materials. Accounting for 80 percent of urban employment in China, SMEs are the main source of jobs and the mainstay of the market.
To help SMEs deal with the global pandemic, China launched a support package for SMEs in 2020, mainly by cutting taxes and fees and waiving employer contributions to employee social insurances. This year, the State Council has extended the measures several times.
In March, the loan support scheme for small businesses was extended until the end of the year. In April, the government raised the monthly threshold for value-added tax from sales of 100,000 yuan (US$15,600) to 150,000 yuan (US$23,629) to ease SMEs’ tax burdens. In September, the People’s Bank of China (PBoC), China’s central bank, raised the quota for special central bank lending by 300 billion yuan (US$47 billion) to support micro businesses as well as SMEs. In October, the government said it would defer tax collection from SMEs for three months from November.
The new document offered no major additional support measures. Instead, it focuses on strengthening the implementation of existing policies at the local level. For example, provincial and local governments are encouraged to launch “targeted support funds” to SMEs in specific industries.
It remains unclear whether these measures are adequate to help SMEs withstand the challenges faced by China’s economy. But with the emergence of the Omicron variant, many of these challenges appear set to stay for the long term. By comparison, most of the existing government support measures are temporary.
Given the importance of SMEs and the severity of economic challenges, the government should consider making some measures permanent to promote policy stability, certainty and predictability, which will be key to China’s efforts to nurture a favorable business environment.
So far, the government has largely relied on fiscal and financial tools to support SMEs. But as the economic dynamics facing SMEs have become more complicated than at the beginning of the pandemic or even a year ago, the government should take a comprehensive approach to address these non-financial problems, including rising production costs, disruption in the power supply and boosting market demand.
The government must stay vigilant, as the predicament of the SMEs will be critical for China to maintain both economic and social stability.