Experience of Western nations can help China find solutions for small firms

Micro and small-sized enterprises have an irreplaceable role to play in China, particularly with regard to generating employment and improving people's livelihood. However, unlike state-owned enterprises, they face more funding difficulties, due to the limited financing channels, higher financing costs and minimum access to commercial bank credit funds.

Since most of these issues are still unresolved, there are concerns on how the Chinese MSEs can tackle the funding concerns in the future, considering that they are largely unable to raise funds from sources such as the capital market.

The capital market in China does not provide any direct or indirect financing channels for the MSEs. This is largely due to the fact that most of these firms are unable to meet the mandatory requirements for listed companies. The capital market is also unable to provide the required diversification for the multi-level degree of risks faced by the MSEs.

Another issue is the disproportionate layout and existing practices of the Chinese capital market. There is no diversification in securities and property rights transactions, combined with the fact that there is also no trading center for local securities and property rights trading. As a result, a majority of the small and micro enterprises are unable to access funds from the capital market.

The existing trading instruments in the capital market are too narrow. Capital flows only to limited investment channels, thereby posing major impediments for transformation from savings into investment. Since the MSEs are often in need of huge amounts of capital, they are left with no option but to find financing channels in informal financial markets.

With economic globalization, the international division of labor and specialization of production, and changes in the domestic macroeconomic environment, MSEs have to withstand increasing pressure, coupled with more severe challenges, such as an outdated management system that lacks funds and social intermediary organizations. These issues ultimately affect the overall strength of small and micro enterprises.

In fact, MSE financing is a problem prevalent in developing countries. The Chinese economy thrives on entity economy, and this problem is also constraining the growth of Chinese MSEs. When addressing these financing difficulties, China should not be subject to traditional ideas.

China should learn from the successful experiences of developed countries and come up with specific measures, according to its actual situation. Western countries use the following measures of market regulation and government policy to support MSEs.

First, it is important to draw on the experience of the United States, especially MSEs in the western states that have access to a robust micro-insurance business.

The MSEs enter into a cooperation agreement with insurance companies through the banks, thereby establishing a mechanism with a small amount, wide coverage, easy operation and reasonable costs.

The bank and insurance institutions together conduct credit investigation of the small borrowers. The bank in accordance with the relevant regulations and requirements sanctions loans for qualified borrowers. The insurance agencies undertake to guarantee the liability on the principal and interest, while the small borrowers have to fulfill repayment obligations.

It is important for China to consider the establishment of multi-sector linkage mechanisms and amass a strong disciplinary force to penalize malicious fraud and dishonest behavior.

China must also create a better financing platform and establish a more convincing credit history by strengthening the cooperation between small and micro enterprises and medium-sized enterprises. An efficient way for this is to create an industry alliance.

Through long-term cooperation and division of labor with MSEs, large enterprises can save a lot of inputs for the production of downstream products and also serve as the locomotive for medium-sized and small and micro enterprises.

Usage of such platforms will also help small and micro enterprises get easier access to bank loans for research and development.

Using the proper government incentives, banks can not only help small and micro enterprises but also gain access to high-quality loan projects. This will not only exert a positive impact on the overall industry chain, but also produce direct economic benefits.

An example of this is Mercedes-Benz's and BMW's production operations and overseas expansion plans, which include co-development projects with tens of thousands of German medium-sized and small and micro enterprises.

With orders and business continuing to expand, some small and micro enterprises can also develop into SMEs, thereby generating more jobs. In Europe and the US, the close relationship among enterprises has helped promote employment and increase tax revenue.

Relatively simple types of loan collateral are also the cause of current difficulties in financing MSEs.

In this regard, the government can guide the banking institutions to increase financial products and services, innovation, explore new ways of loan guarantees and credit, and broaden the scope of collateral to encourage banking institutions to provide new collateral warrants from trademark, accounts receivable, inventory goods, machinery and equipment. This has been adopted and used by Western countries for years.

In addition, making inventory as collateral can help MSEs accelerate inventory turnover and obtain initiatives on procurement. It can also help them increase sales and customers and expand market share.

Not only does this help improve efficiency in the use of funds, but also effectively solve guarantee, mortgage and loans difficulties for MSEs.

The author is a researcher at China Association of Small and Medium Enterprises.

(China Daily European Weekly 06/28/2013 page9)