China Institute of Economic Trends: As a scholar who has been tracking the operation of the Economic Daily-PSBC Small and Micro-sized Enterprise Operating Index (SMEOI) for a long time, what do you think are the highlights of the SMEOI latest released?

Li Quan:

In March, China’s Manufacturing Purchasing Managers’ Index (PMI) stood at 50.6%, 1.3 percentage points higher than the previous month. In the same month, the SMEOI rose by 0.2 point to 44.3 compared with February, setting a new high since the outbreak of the COVID-19 pandemic in 2020 and the economic recovery after the pandemic. Under the backdrop of China’s upturn in the macro economy, the SMEs presented a steady expansion trend.

The reasons for the rise of the SMEOI could be analyzed by means of component indices. Among them, both the market index and purchasing index increased significantly, indicating that the full resumption of work and production had driven the SMEs to expand production capacity. The market index was 39.8, indicating that the overall market demand had not fully recovered; however, the purchasing index reached 42.4, laying a sound industrial foundation for the continued growth of SMEs in the next period.

The manufacturing industry index rose by 0.3 point to 45.4. In particular, it was found in the survey that the recovery of the manufacturing industry was not only limited to the release of production capacity brought about by the rebound in market demand. Facing the complex market environment, some small and medium-sized enterprises begun to positively increase R&D investment, so as to open up the market by improving product quality. The trend of economic restructuring was gradually being transmitted to SMEs, and the trend of high-quality development of SMEs began to show up.

In addition, the transportation industry index rose by 0.2 point, showing that the orderly vaccination had promoted the recovery of passenger flow and people’s lives were gradually returning to normal. The construction industry index ascended by 0.2 point as a whole, and its purchasing index increased sharply by 0.4 point, indicating that the growth of key projects will continue, including new infrastructure, new urbanization, and major projects such as transportation and water conservancy projects.

SMEs in different regions also had their own bright spots. The overall index of East China, where work and production resumed well, continued to rise by 0.1 point, while that of North China and Central & Southern China went up 0.3 point respectively, suggesting the strong recovery of production and operation in Central China. Specifically, the purchasing index of East China increased by 0.3 point, and that of Central & Southern China climbed by 0.4 point, thus laying a solid foundation for the continued growth of relevant regions in the next stage. The market index and risk index of North China rose by 0.4 point, hence the growth of this region is expected to continue. The financing index of Northwest China increased by 0.3 point, which was commendable in the weak regions for the development of SMEs, showing that the implementation of financial reforms was gradually advancing in relevant regions.

China Institute of Economic Trends: The latest index performance is eye-catching. What do you think are the factors that support the trend of the index?

Li Quan:

The strong recovery of SMEs is inseparable from policy support.  

The 2021 government work report emphasizes the need to further solve the financing problems faced by SMEs. The Ministry of Industry and Information Technology will increase support for the development of small and medium-sized enterprises as one of the key tasks in 2021. In the future, the rapid implementation of relevant fiscal policies and the orderly advancement of financial policies will prop up the sustainable and healthy growth of SMEs.

In terms of fiscal and taxation policies, relevant tax relief provisions stipulated in Caishui [2019] No. 13 Document will be continuously implemented, including VAT reduction and exemption policy. That is, from January 1, 2019 to December 31, 2021, small-scale VAT taxpayers with monthly sales of less than RMB100,000 (inclusive) will be exempted from VAT. With respect to the corporate income tax of small enterprises with meager profit, the part of annual taxable income that is less than RMB1 million should be included in the taxable income at a reduced rate of 25%, and corporate income tax should be paid at a tax rate of 20%; for the part of annual taxable income that is more than RMB1 million but less than RMB3 million, it should be included in the taxable income at a reduced rate of 50%, and the corporate income tax should be paid at the tax rate of 20%. Besides, according to the provisions of Fagaitigai [2020] No. 1566 Document, SMEs’s trade union outlays from January 1, 2020 to December 31, 2021 will be fully refunded. In addition to the inclusive tax relief policy for SMEs this year, the SMEs severely affected by the COVID-19 can also be approved for tax deferment according to law.

In terms of financial policies, the People’s Bank of China and financial regulators have issued various policies to solve the financing problems of SMEs. New policies require large commercial banks to increase inclusive loans for SMEs by more than 30%. This year, more convenient financing must be provided for SMEs, and their overall financing cost must be steadily reduced. For the continuity of policies, the financial system will continue to execute the inclusive loan extension support tool and inclusive unsecured loan support plan for SMEs; in the orderly execution of relevant tools, the inclusive central bank lending and rediscounting policy will be continuously implemented, so that financial institutions could be guided to provide more support for “agriculture, rural areas, and farmers”, SMEs, and private enterprises on an ongoing basis. The People’s Bank of China also requires that commercial banks should continue to carry out the project on improvement of financial service capabilities for micro, small and medium-sized enterprises, and these banks are also supported to grant more loans to the “agriculture, rural areas, and farmers”, SMEs and the manufacturing industry. Besides, banks are encouraged to comprehensively evaluate the credit risk of SMEs and reduce their reliance on mortgage guarantee. With regard to the financing support for the supply chain and industry chain, banks are supported to issue special SME financial bonds, promote ownership certification of supply chain bills and receivables, and help enterprises to seek financing by issuing debentures. Moreover, the market is guided to introduce more supply chain financial products, so as to bolster the financing of SMEs in the upstream and downstream of the industrial chain; meanwhile, the rural financial service system should be continuously improved, more credit support should be provided for the development of key agricultural areas such as the seed industry, and the poverty alleviation project should also be carried out appropriately.

China Institute of Economic Trends: Supportive policies have effectively hedged the impact of the pandemic on SMEs. With the promotion of vaccines, the economic situation is improving. Do you think that the supportive policies for SMEs need to be adjusted? If so, what adjustments should be made?

Li Quan:

SMEs are expected to recover continuously, but more supportive policies should be introduced.

As of the end of March, China reported a total of more than 100 million doses of COVID-19 vaccinations. The vaccination work is still progressing in an orderly manner. In such a state of effective fight and active prevention against the pandemic, the impact of the COVID-19 on the economy and society is expected to further decline, and SMEs will also recover and enter into a state of healthy development.

At present, the biggest macroeconomic uncertainty is external factors. As global trade protectionism is on the rise and barriers are rising, China’s import and export trade as well as international investment and financing may be affected. Though the development of SMEs mainly relies on the domestic market, international market risks may still be transmitted to SMEs through the industrial chain, and the foundation for the recovery of SMEs is still fragile.

It is suggested that ongoing policy support should be provided for SMEs in the following aspects for a future period of time.

First, we should maintain and promote the low-cost operation of SMEs. After the outbreak of the COVID-19 pandemic last year, the central and local governments at all levels initiated policy support for SMEs such as tax cut, fee reduction and rent relief. This year, relevant policies in some regions are withdrawing, which may affect the sustainable development of SMEs. Under the background that the internal and external situation is still complicated and severe, we should continue to implement the policies of rent relief, tax cut, and various administrative fee reductions for weak SMEs, so as to realize the sustained stability and improvement of SMEs.

Second, we should accelerate the digital transformation of SMEs. The development trend of the digital economy is irreversible. SMEs are closely connected with terminal consumption. Digital transformation will help the expansion of SMEs and promote the orderly growth of consumption. At present, various SMEs that have achieved digital transformation have gained significant growth in sectors such as catering, transportation and retail. The next step is to keep strengthening the construction of emerging infrastructure and lay the hardware foundation for the digital transformation of SMEs. Meanwhile, it is also necessary to constantly improve the business environment for SMEs in accordance with the instructions of the Central Government, so as to lay the institutional foundation for the transformation and development of SMEs.

Third, we should give more precise financial support for SMEs. Under the traditional financial system, financial institutions are less willing to grant loans to SMEs due to their poor capability in resisting risks. To change the status quo, regulatory indicators should be introduced, for example, setting the proportion of micro and small loans. Furthermore, in response to the micro and small financing arrangements of financial institutions, more favorable tax incentives and targeted fiscal subsidies should be offered, so that financial institutions could have the motivation and ability to provide sustained and stable financial support for SMEs.