Sun Wenkai, Research Fellow from the Research Institute of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, and Professor at School of Economics, Renmin University of China

The Economic Daily – PSBC Small and Micro-sized Enterprise Operating Index (SME Index) in October 2020 remained the same as last month. Of the seven sub-indices,  the purchasing index and the confidence index each gained 0.2 percentage point compared with the prior month, the market index and the performance index remained unchanged, while the other four indices went down slightly. For the indices of the six regions, the southwest region picked up 0.3 percentage point, the central and southern region increased 0.1 percentage point, the eastern region index remained unchanged, and the indices of other regions all dropped somewhat compared with a month ago. Regarding the indices of seven industries, the manufacturing and transportation industries both edged up 0.2 percentage point while those of other industries shrank a little.

The SME Index of the manufacturing industry performed extremely well in October. The manufacturing index recorded the highest reading with its sub-indices such as market index, purchasing index, performance index, expansion index and confidence index all rising significantly. Seen from the detailed results, many indicators including the order volume, output and capacity-utilization rate of small and micro-sized manufacturing enterprises improved significantly, and such indicators as inventory, profit and employment also climbed slightly. The financing index and the risk index declined somewhat, but still kept their absolute value above 50. The steady recovery of the industry could be attributed to the stabilized macro economy, especially the growth in exports.

The recovery of production drove increase in freight volume. The SME Index of the transportation industry gained 0.2 percentage point in October. Most of its sub-indices such as purchasing index, performance index, expansion index and confidence index all increased somewhat.

Small and micro-sized enterprises still saw their recovery subject to certain restrictions despite the overall economic recovery. On the one hand, the recovered production drove up the prices of raw materials and the overall costs facing enterprises. Due to their limited bargaining power, small and micro-sized enterprises could do nothing but accept the rising costs. The total cost index of small and micro-sized enterprises declined somewhat in October. From a regional perspective, except for the northeast region, all the five other regions witnessed their cost index declining in October, which reflected an increase in the composite costs of small and micro-sized enterprises. On the other hand, although demand including exports rebounded, the overall demand was still insufficient relative to the production capacity, which was especially so for small and micro-sized enterprises. Most industries presented a falling SME market index. Declining product prices were seen in market indices for industries including agriculture, forestry, animal husbandry & fishery, manufacturing, transportation, wholesale & retail, accommodation & catering and service.

Insufficient consumption demand relative to production will still be a huge challenge facing small and micro-sized enterprises for some time to come. On the production side, a variety of economic indicators have improved significantly, and the economy has continued recovering at a steady pace. The cumulative growth rate of fixed asset investment turned positive. All enterprises have basically resumed their production, and the continuously increased employment led to a constant decline in the surveyed unemployment rate. Among small and micro-sized enterprises, those in the manufacturing, construction and transportation industries kept raising their equipment utilization rate and capacity-utilization rate, and those in such industries as accommodation & catering basically resumed operation in full scale. However, the total retail sales of social consumer goods still posted a decline in the cumulative growth rate for the first three quarters of 2020. Small and micro-sized enterprises in such industries as agriculture, forestry, animal husbandry & fishery, construction, transportation, accommodation & catering, wholesale & retail and service registered slightly decreased orders and business reservations, and the insufficient demand, therefore, brought down product prices across the board. Small and micro-sized enterprises of China usually suffer from problems like a narrow focus in business, weak bargaining power and meagre profit, and rely heavily on external markets, thus are more susceptible to the volatility of market demand.

Since the COVID-19 outbreak, many government departments have issued a number of preferential policies in support of medium, small and micro-sized enterprises, which included tax breaks and credit concessions. These policies played an important role in helping small and micro-sized enterprises stabilize their production and operation. At present, small and micro-sized enterprises are in a relatively loose environment for financing, and the SME financing index has long stayed above the prosperity threshold. Future policies may focus on promoting domestic demand in the following aspects, so as to stimulate the development of small and micro-sized enterprises on the demand side:

First, the current fiscal policies in support of the real economy should be maintained to continuously increase the financial support for small and micro-sized enterprises.

Second, monetary policies could be used to promote domestic demand. While paying attention to producers, it is also important to promote consumer credit, expand consumption growth in scale, and boost market demand continuously.

Third, more flexibility could be added to the fields of production and consumption as far as possible, so as to improve the vitality of the entire economy, enhance the internal circulation, drive the increase in effective demand, and alleviate the problem of insufficient demand faced by enterprises.