Moderator: What characteristics did the movement of the SMEOI demonstrate in April?

Sun Wenkai:

The Economic Daily – PSBC Small and Micro-sized Enterprise Operating Index (SMEOI) in April 2021 remained the same as last month.

Seen from the historical movement of the SMEOI, that the general index could remain the same as last month in April is praiseworthy. That’s mainly because the index is generally at its lowest of the year in February with the Spring Festival holiday. In March, the index rises significantly, and in April, it slightly falls compared to that in March. That the index could remain unchanged instead of falling in April reflects the continuous recovery momentum of small and micro-sized enterprises (SMEs). There are two highlights that worth paying attention to: first, the financing index maintained above 50, indicating further improvement in the financing environment for SMEs; second, the performance index picked up. In particular, the performance index of the accommodation & catering industry, which was affected the most by the pandemic earlier, witnessed a bigger rise.

In April, we conducted a special survey on SMEs using PSBC’s survey system. The survey results show that because the financing support to SMEs remained the same as that provided during the pandemic, it was easier for SMEs to get financing and the cost was also lower. Overall, the financing needs of 84.5% of SMEs were met. Even in the construction industry, which had the poorest performance among industries, the financing needs of 77% of SMEs were basically met; and in Northwest China, which had the poorest performance among regions, the financing needs of 76% of SMEs were basically met. The interest rate of financing for SMEs continued to decrease compared to our survey results in the same period last year.

The overall performance index of SMEs improved significantly compared to that in the same period last year. Over 70% of SMEs thought they fully recovered to normal operation, and 67.4% saw their turnover increased markedly. The turnovers of the accommodation & catering industry and the tourism industry increased by 100%, and their net profits also rose significantly.

In April, China’s Manufacturing Purchasing Managers Index (PMI) recorded 51.1%. Even though it’s 0.8 percent point down from the previous month, it maintained above the critical point for the 14th month straight, showing a continuous expansion trend in the manufacturing industry. The non-manufacturing business activity index was 54.9%, down 1.4 percent points from the previous month but remaining above the critical point. The manufacturing PMI of small enterprises was 50.8%, 0.4 percent point higher than that in the previous month, indicating continuous improvement. Those indicators are basically consistent with the SMEOI.

Moderator: The SMEOI performed better that it did in the same period last year. What do you think are the main reasons?

Sun Wenkai:

First, the continuous improvement in the macro economy has provided a good market environment for the operation of SMEs. 2021 is the first year of the 14th Five-year Plan period. In the face of the pandemic and the uncertainties in the external environment, governments at all levels have been working hard to consolidate the achievements in the Covid-19 response and economic and social development. In Q1, GDP grew by 18.3% year on year, and its average growth over the past two years was 5.0%. Consumption was recovering faster. Sectors that were more severely impacted by the pandemic such as catering grew by around 75% year on year. The catering industry has already recovered to almost its normal level in 2019.

Second, proactive fiscal and taxation policies were issued. The Notice on Continuing to Implement the Preferential Policy for Some Taxes and Dues in Response to the Pandemic released in March states that the implementation period of some preferential taxation policies for SMEs will be extended to December 31, 2021. Tax reduction policies have played a positive role in the improvement of the performance of SMEs.

Third, financial support policies continued. In March, the central bank and other agencies jointly issued the Notice on Further Extending the Implementation Periods of the Policy of Allowing Micro and Small Enterprises to Defer Principal and Interest Repayments on Inclusive-finance Loans and the Credit Loan Support Policy, to continue to support and expand inclusive finance and postponement of repayments on inclusive-finance loans. In April, China Banking and Insurance Regulatory Commission issued the Notice on Further Promoting the High-quality Development of Financial Services for Micro and Small Enterprises in 2021, stressing that credit loans to SMEs should be increased and the financial supply structure should be optimized to ensure that institutions are confident, willing, able to and know how to grant loans, and stating that it will strengthen oversight and urge financing institutions to issue inclusive-finance loans. It’s found in our survey in April that among all the costs of SMEs, financing cost fell the most, reflecting the effectiveness of financial support policies.

In addition, SMEs’ own role is also critical. SMEs have made adequate adjustment over the past year and more since the outbreak of the pandemic. They have grown stronger and more resilient to the external environment, which have enabled them to seize the opportunity of the recovery of the macro economy and improve their business.

Moderator: After the SMEOI fell to its lowest point in recent years during the pandemic, the general index gradually recovered and maintained a steady rising trend. Among the component indices, the market index and the performance index continued to improve, and the financing index and the cost index remained above the critical point. In your opinion, is the rise of the indices temporary or will it tend to continue?

Sun Wenkai:

By analyzing the reasons for the changes in the indices, I think the steady rise of the indices probably tends to continue.

First, the macro economy is recovering, laying a solid foundation for the stable recovery of SMEs. According to the data published by the National Bureau of Statistics, the Q1 average economic growth in 2020 and 2021 was 5.0%, lower than the 6.4% growth in 2019; the quarter-on-quarter growth in Q1 2021 was 0.6%, also lower than that before the pandemic. That indicates China’s macro economy hasn’t fully recovered yet. In particular, the service industry, which has been affected the most by the pandemic, still lagged behind other industries in Q1 2021, showing greater room for growth in future. Moreover, given the resurgence of the pandemic overseas, we remain optimistic about China’s export this year. The great growth potential of the macro economy has created conditions for the development of SMEs.

Second, fiscal policy and monetary policy are unlikely to be tightened. There are nearly 120 million SMEs, accounting for over 90% of the total number of market entities, making them the core to ensure employment. It has been made clear that some fiscal and monetary support policies for SMEs will continue before the economy fully recovers to its normal level.

Third, the effective control of the pandemic is good for the overall economic recovery. As at May 4, 2021, China reported that 284,595 thousand Covid-19 vaccine doses had been administered and all new Covid-19 cases were inbound cases. It can be said that the pandemic has been effectively controlled in China. With vaccine administered on a large scale around the world, the world economy, which is currently recovering locally, will achieve holistic recovery eventually.

The results of the special survey on SMEs match the judgment. Most of the SMEs surveyed believe that the industry will fully recover to its normal state in three months.

Sun Wenkai:

While holding an optimistic view about continuous economic recovery, we should watch for some uncertainties. Those uncertainties include the investment in the private sector and entrepreneurs’ investment confidence, both of which haven’t fully recovered. Our April survey finds that nearly 90% SMEs didn’t have an expansion plan. In the meantime, labor cost and raw material cost increased significantly. The April survey shows that the biggest problem SMEs currently face is the rise in labor cost, followed by rise in raw material prices, fiercer industry competition, and insufficient market demand. Recruitment difficulty, expensive labor and rise in raw material prices will bring certain uncertainties to the recovery of SMEs.

On the whole, most SMEs have recovered to normal operation, but the recovery is fragile and needs policy support. The survey shows that what SMEs currently need the most are still continuous tax abatement and tax deferral and continuous access to low-cost financing. In the meantime, the bigger risks that SMEs face in operation come from the rise in labor cost and raw material cost. To address the problem, the following measures may be adopted:

First, further reduce the restrictions on labor mobility due to the control measures of the pandemic and help match labor with enterprises as soon as possible, so as to reduce recruitment difficulty and therefore address expensive labor.

Second, while offsetting the rise in other costs through tax abatement and reduction of financing cost, promote digital transformation in SMEs to reduce their operating cost and provide price subsidies to important commodities, to reduce SMEs’ cost in all respects.