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Small and Micro-sized Economy Needs More Time to Recover

Date: 2016-04-26

Researcher Li Quan at Research Institute for Fiscal Sciences, the Ministry of Finance

In 2016, small and micro-sized enterprises (SMEs) in some industries and some regions across China come under the greatest operating pressure in years, which can be clearly seen in the rocky performance of “Economic Daily-PSBC Small and Micro-sized Enterprise Operating Index” (hereinafter referred to as “SMEOI”). In January 2016, the index reported 46.4, showing a slight decline over November and December 2015 when it remained unchanged. This indicates that small and micro-sized economy still needs more time to pick up and it is especially true when seen from the details of the index.

From various sub-indices, a dropping market index reflects the weak market and sluggish demand; a decreasing performance index reveals the poor operation and worsened performance of SMEs; a decline in the financing index means SMEs are faced with financing difficulties and may slip into fund strain in the coming phase; as a positive indicator, the risk index, if falling, will suggest greater operating risks for SMEs; a worsening confidence index indicates SME owners are losing confidence. An increase in the purchasing index and the cost index is supposed to be good. However, against such a backdrop, it just indicates that SMEs are bearing more operating pressure and will be likely to continue a sluggish operation in the next period.

What’s worse, the performance of the index by region is also worrisome. SMEOI of North China stood at 45.0, down 0.6 point, that of Northeast China 44.4, down 0.3 point, that of East China 46.9, down 0.5 point, and that of Northwest China 43.5, down 0.6 point. The four regions cover a wide range of areas along “the Belt and Road”, within the “Beijing-Tianjin-Hebei” Region and in the “Yangtze River Economic Belt”. These regional strategies constitute the important sources of momentum for China’s economic development in the next phase. It is obvious that these regions still continue the de-capacity processes.

This situation is mainly caused by three factors. (1) After having persisted in the extensive development mode for years, the Chinese economy is seeing the comprehensive return on invested capital on the decrease. The decline is particularly marked in the industries with overcapacity, and has the greatest impact on SMEs that occupy at the end of industry chain. (2) The current Chinese administration has launched the reform on the supply front which strictly confines the options of adjusting industry structure as developing emerging industries and optimizing traditional capacities, a move giving a severe blow to SMEs at the end of traditional industries. (3) Despite the international economic recovery already in sight, a large number of badly-run companies worldwide will go into bankruptcy and SMEs demonstrating the poorest risk tolerance are no exception. Under such a background, how far small and micro-sized economy will go attracts tremendous attention in 2016.

Stemmed from the three trends above, the transformation of economic development mode and the economic structural adjustment will complete and consolidate in recent years. In the process, the macroeconomic operation is still not optimistic. In 2016, one of the critical years, the Chinese economy lingering at the bottom and the uncertain international economy will drag down small and micro-sized economy further. Therefore, it is suggested that extraordinary policies in favor of small and micro-sized economy be rolled out and multiple measures be taken to put such policies in place this year. With these efforts, a new landscape is expected to form where SMEs suitable for national strategies will flourish and the zombie ones will exit from the market at an accelerated pace.