Sun Wenkai, Associate Dean of National Institute of Small and Medium-sized Enterprises, Renmin University of China; Professor at School of Economics, Renmin University of China

In August 2021, the Economic Daily – PSBC Small and Micro-sized Enterprise Operating Index (SME Index) reflecting the overall operation of micro and small-sized enterprises (MSEs) increased steadily for 17 consecutive months before a slight decrease of 0.1 point. Overall, MSEs have maintained stable operation.

The decline of the SME Index was due to the general decline of component indices. Among them, the market index, performance index, expansion index, confidence index and risk index decreased by 0.1 point respectively; the purchasing index decreased by 0.2 point; the financing index was the same as that of the previous month, and the cost index increased by 0.1 point. The decline in the market index was mainly due to the decline in the main business income of enterprises in various industries compared with the previous month. The market indices of the agriculture, forestry, animal husbandry & fishery industry and manufacturing industry remained the same as the previous month, while the market indices of the other five industries decreased slightly. In addition to the southwest region, the market indices of other five regions also went down slightly. Affected by the decline of profits, the performance indices of other industries and regions all decreased slightly in addition to the agriculture, forestry, animal husbandry & fishery industry and the southwest region. Affected by the market and performance, the confidence index reflecting expectations generally decreased across various industries and regions. The purchasing index dropped significantly, mainly due to the decline in the raw material procurement. The decline of risk index was due to slower capital turnover and the prolonged payment cycle of MSEs in various industries. The decline in the expansion index was due to fewer new investments and decrease in number of employees. The cost index of several industries and regions decreased, mainly due to the decrease of their total operating cost.

A main focus of attention is that the financing index remained high. Specifically, the financing environment of MSEs in the manufacturing industry continued to improve and the financing demand increased while financing was less difficult.

Among the six regional indices, the indices of North China, Northeast China, East China, Central & South China and Northwest China all decreased by 0.1 point, and the index of Southwest China was the same as that of last month. In the southwest region, even when the expansion, purchasing, market and performance indices did not decrease, the cost index improved, and the confidence index rose. North China, East China, Central & South China and Northwest China showed the largest decline in purchasing index, while Northeast China showed the largest decline in confidence index.

From the perspective of industrial indices, except that the index of MSEs in the agriculture, forestry, animal husbandry and fishery industry remained the same as the previous month, the indices of the manufacturing, construction, wholesale & retail and other service industries all decreased by 0.1 point, and the indices of the transportation industry and the accommodation & catering industry both decreased by 0.2 point. It is worth noting that the component indices of the accommodation & catering industry decreased across the board, and the market, purchasing, performance and confidence indices all decreased significantly by 0.3 point.

The main reasons for the decline of the SME Index in August are as follows.

Firstly, the macroeconomic recovery was not yet stable. According to the data in recent months, the economy continued to recover, but the growth rate of production and consumption showed a downward trend, and the market demand was still insufficient. Although the purchasing managers’ index (PMI) in the manufacturing industry was above the boom threshold, it has fallen for five consecutive months. The PMI of small enterprises has been below the prosperity threshold for four consecutive months, and the new order index, raw material inventory index, employee index and supplier delivery time index of small enterprises have all been below the threshold. Other macro indicators such as money supply, freight volume, service industry production index and the growth rate of real estate investment all declined somewhat. The total retail sales and online retail sales of social consumer goods reflecting consumer demand grew by a much smaller extent compared to the same period of the prior year..

Secondly, the scattered outbreak of the epidemic domestically had a great impact on the market. According to the provincial data, the SME Index of the provinces affected by the epidemic generally declined. Tourism and consumption in August were worse than expected. In particular, the accommodation & catering industry and transportation industry suffered great impact from the epidemic. The indices by industry showed that the indices of these two industries decreased by 0.2 point respectively, which was the industries with the largest decline in August.

Thirdly, commodity prices remained high. The rising price of raw materials increased the cost pressure on enterprises and squeezed their profits. Since the beginning of this year, the producer price index (PPI) has exceeded the consumer price index (CPI), and the gap has widened recently. Due to the rise of nonferrous energy prices, the price of production goods rose faster than that of consumer goods, and MSEs lacking bargaining power were under great pressure in the short term.

Fourthly, the impact of emergencies such as natural disasters continued in some areas. The torrential rain in Henan Province in late July caused direct economic losses of more than RMB100 billion. Although the local government has taken many countermeasures, the operation of enterprises has not yet fully recovered. All component indices of MSEs in Henan Province dropped across the board, with the performance index declining the most.

The SME Index has been rising steadily for over a year, and each component index continue to improve. However, due to uncertainties in the internal and external environment, the SME Index will continue to fluctuate for the near future and is expected to strengthen as the economic recovers in the long term.

From the perspective of commodity prices, there are three main reasons for the rise of domestic commodity prices in the past year. Firstly, the US dollar was over issued. As many commodity prices ware denominated in US dollar, commodity prices with financial attributes rose rapidly due to expectations and currency factors. Since March 2020, the money supply in the United States has grown at a much faster rate than that in China. However, the RMB’s appreciation against the US dollar has been relatively slow. The exchange rate has further driven up the prices of commodities entering China. The second reason is the misalignment between supply and demand of commodities. The global economy as a whole is recovering and market demand is increasing. However, major commodity suppliers are affected by the epidemic with reduced production capacity, which is made worse by the insufficient international shipping capabilities, resulting in short-term undersupply. The third is the policy factor. The steel and coal capacity cuts help raise their prices. Meanwhile, the green transformation of the economy derives demand for copper and other non-ferrous metals, which pushes up the prices as well.

Judging from the current trend, the factors affecting commodity prices will remain unchanged in the short term. First of all, due to the impact of the epidemic and the high unemployment rate, the United States will not start its bond-buying taper plan in the short term, and the money supply will continue to grow at a fast rate. Secondly, global production capacity will continue to recover. The demand for bulk commodities are gradually shifting from China to the United States and Europe, and there is still much room for demand to rise. Thirdly, China’s domestic industrial policies will also continue to affect the prices of relevant raw materials. But in the long run, these factors will return to normal, and enterprises will mainly face short-term cost pressures.

The impact of epidemic and emergencies on enterprises is relatively small. Since the end of July, local governments have taken measures to prevent and control the epidemic. Although strict prevention and control measures have an adverse impact on the economy in the short term, they will help the economy to recover quickly. The accommodation & catering industry and transportation industry are expected to pick up soon. The impact of floods, typhoons and other emergencies on enterprises will not last long based on historical experience.

According to survey, some MSEs have taken measures to improve the product prices, bring down various operating costs and negotiate the long-term price of raw materials in response to the challenges brought by changes in the external environment. MSE owners also hope that the government can regulate the prices of raw materials, match buyers and suppliers, further strengthen favorable financing, and maintain preferential policies such as rent reduction and exemption.

Based on the above analysis, the following policy suggestions are put forward.

Firstly, use big data and other means to optimized the control of epidemic, reasonably relax restrictions on economic activities such as meetings, tourism, and catering under controllable conditions, and promote the recovery of relevant industries. Subsidies could be given to accommodation, catering, and transportation enterprises that have been significantly affected by the epidemic.

Secondly, the rise in commodity prices is mainly affected by external factors, especially the excessive easing of the US dollar and US dollar pricing. It is recommended to adjust the RMB exchange rate more flexibly in the short term to speed up its appreciation. For domestic enterprises in bonded processing trade, the exchange rate appreciation will not affect their operation, but it will reduce costs for export enterprises engaged in domestic sales, especially micro, small and medium-sized enterprises. In the long run, it is recommended to improve the international status of RMB. Commodities purchased in large quantities should be priced at negotiated prices or in RMB to improve the pricing power of bulk commodities.

Thirdly, upstream, midstream and downstream enterprises should be coordinated to reasonably share the pressure of rising costs through agreements. The survey in Ningbo City found that through agreements, large enterprises leveraged financial hedging technology to cooperate with small enterprises in raw materials, production and sales, and stabilized the operation of small and medium-sized enterprises.

Fourthly, cultivate and strengthen the bargaining power of micro, small and medium-sized enterprises. Encourage them to raise the awareness of innovation, strengthen technological innovation to promote enterprise transformation, reduce production costs and increase product added value so as to fundamentally improve their market competitiveness. The survey found that innovative small and medium-sized enterprises have significantly stronger bargaining power and cost transfer ability. At present, China has achieved initial results with its policy of cultivating high-tech enterprises and those featuring specialization, refinement, differentiation, and innovation. It is necessary to integrate all forces to provide in-depth and practical services for small and medium-sized enterprises and ensure the implementation of various policies.