The Economic Daily – PSBC Small and Micro-sized Enterprise Operating Index (SMEOI) fell in October under the force of multiple factors both at home and abroad, with the subindices, regional indices, industrial indices and the overall index all reporting a drop. But there are highlights, too. The financing index, which remained the same as the previous month, is still within the range of prosperity and has been improving for more than one year.

The fall was due to several reasons.

Firstly, the economic growth has slowed down. China’s GDP grew by 4.9% year on year in the third quarter, and the growth rate of production and consumption data in recent months showed a downward trend, underlining a lack of demand. The manufacturing Purchasing Managers’ Index (PMI) fell for the seventh straight month to 49.2% in October, which was in the contraction range for a second consecutive month. In October, the PMI of small enterprises and that of medium-sized enterprises were 47.5% and 48.6%, respectively, indicating that small businesses were faring worse. A survey by the National Bureau of Statistics (NBS) showed that more than 40% of small enterprises complained about high raw material costs, financing constraints and insufficient market demand, with some of them facing headwinds on multiple fronts.

Secondly, the real estate sector faces bleaker prospect due to tighter regulation, with some of the large real estate firms defaulting on their debt obligations. As China has introduced “three red lines” to regulate the financing by real estate companies and will soon pilot property tax, the investment and financing activities in the sector are affected, causing a decline in the real estate investment growth rate. Some micro and small-sized enterprises (MSEs) in the construction industry have suffered as a few large real estate players have debt problems with a credit downgrade, and consumers show less interest in buying houses.

Thirdly, higher raw material and labor costs are squeezing enterprises’ profits. The continuous rise in international commodity prices has pushed up China’s Producer Price Index (PPI). Since the beginning of this year, PPI has exceeded the consumer price index (CPI) and the gap has been widening lately. Meanwhile, labor costs keep rising. Statistics released by the National Bureau of Statistics show that before the epidemic, the annual increase in wages of urban employees averaged around 10%, and even in 2020 when the virus swept the country, the increase still exceeded 7.5%. However, rising labor costs is a long-term phenomenon and will be translated into economic demand. The rise in raw material costs caused by increasing commodity prices may last a long time and, in the short term, has a greater impact on enterprises.

Fourthly, power rationing has exerted an impact on MSEs. The rationing is mainly due to industrial recovery and a surge in residential power consumption. In addition, rising coal prices have led to higher costs for power suppliers, resulting in limited power generation. The power and production restrictions in a number of provinces have constrained the production of some enterprises. Among them, manufacturing MSEs have been affected badly.

Fifthly, scattered outbreak of the epidemic has dealt a blow to the market. The multiregion outbreak has affected local economy, putting pressure on the recovery of driving forces at both supply and demand ends. As the Winter Olympics approaches, the epidemic prevention and control efforts are intensified, which may further impact the economic recovery. Due to unstable internal and external environment, it is expected that the SMEOI will continue to fluctuate within a small range in the coming months.

To this end, the following recommendations are proposed.

First is to stabilize the macroeconomic growth. A continued decline in economic growth may have a great impact on employment. Therefore, we need to speed up the industrialization of new growth drivers and form new engines to ease the economic slowdown.

Secondly, in terms of fiscal and tax policies, it is recommended to extend the policy of a reduced VAT rate of 1% for small-scale taxpayers as a long-term legitimate policy. An online survey by AliResearch in the third quarter showed that among the various relief policies introduced and continued during the epidemic, fiscal and tax policies generated the best results and were most welcomed. Among them, the policy of the reduced VAT rate of 1% is proved to be the most significant and effective one.

Thirdly, in terms of monetary policy, relatively loose monetary policies should be implemented in the short term to improve the current situation of slower capital turnover of enterprises. At the same time, targeted easing policies for MSEs should be maintained.

Fourthly, optimize power supply management and try to achieve the goals of both energy consumption control and efficiency through price management.

Fifthly, it is recommended to use big data and other means to optimize epidemic prevention and control measures, reasonably relax restrictions on economic activities such as travel, conferences, tourism, catering where risks are under control, promote the recovery of relevant industries, and provide appropriate subsidies to enterprises in the accommodation & catering and the transportation industries that are disproportionately affected.

Finally, expectation management should be strengthened. The government must demonstrate its determination to stabilize the economy and assist MSEs through various policies, thus enhancing enterprises’ confidence.