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Expanding Demand and Stabilizing Expectation are Key in Supporting Micro and Small Enterprises

2022-01-27

Sun Wenkai

In December 2021, the PSBC Small and Micro-sized Enterprise Operating Index (SMEOI) stood at 44.4, up by 0.1 point compared with the previous month. The index shows the following characteristics.

First, the overall index rebounded from the previous month, but its absolute value remained at a low level. In the past 12 months, the index recovered steadily in the first half of the year, then fluctuated significantly in the second half of the year. Second, although the performance index rose, the confidence index and expansion index reflecting expectations showed a downward trend. New investments and the number of new employees declined, indicating that enterprises are not optimistic about the future. Third, most industry indices picked up slightly. However, the decline of the manufacturing index is worth noting because the manufacturing industry and the wholesale & retail industry are not only the main sectors for job creation, but also the main driving forces of the overall recovery of SMEOI. Fourth, regional divergence was still quite noticeable. The index of three northern regions continued to hover at a low level, and the gap between the north and the south was yet obvious. The index of Northwest China which was heavily hit by the epidemic saw a rise in December 2021, but its absolute value still ranked the second lowest among all regions.

The trend of SMEOI was consistent with other monitoring indicators. According to the purchasing managers' index (PMI) of China's manufacturing industry in December 2021, the PMI of medium and large-sized enterprises stood at 51.3%, while that of small enterprises decreased by 2.0 percentage points to 46.5%. The PMI of small enterprises has been lower than the prosperity threshold for more than half a year. What’s worse, the production, new orders and employees of small enterprises all declined, and the delivery time of suppliers were extended in December. The production and operation expectation subindices of small enterprises decreased significantly by 4.0 percentage points to 47.9%, showing that enterprises' confidence in future operation weakened. In addition, according to the online SME survey by AliResearch, more than half of the enterprises saw sales revenue decreasing in the fourth quarter compared with the same period last year. Among all factors, lack of demand presents a major difficulty for small and medium-sized enterprises.

The Central Economic Work Conference 2021 identifies that the Chinese economy is facing pressure from demand contraction, supply shocks and weakening expectations. The threefold pressure poses a greater challenge for micro and small enterprises (MSEs) as they do not have much pricing power to pass on costs. Specifically, lack of demand has become a ongoing reality since the outbreak of the epidemic. Although the economy has recovered rapidly under China's effective epidemic prevention and control efforts, it is difficult to return to the normal level. In the context of sporadic outbreak of the epidemic, the recovery of demand in certain industries is greatly restricted. The recent PSBC survey shows that the capacity utilization rate of MSEs is still low. Only 66.14% of MSEs achieved a capacity utilization rate of more than 90%. Enterprises believe that the resurgence of the epidemic is still the primary factor restricting their development in 2021.

As for the supply shocks caused by rising raw material prices, recent policies to strengthen energy supply and stabilize market prices began to show effect. Accordingly, the shortage of power supply has been alleviated, and the prices of certain raw materials have fallen. According to the PMI data of December 2021, the purchase price index and factory gate price index of major raw materials were 48.1% and 45.5% respectively, down 4.8 and 3.4 percentage points from the previous month. The indices have been dropping for two consecutive months, hitting the lowest point since May 2020. The constraints of rising commodity prices on production are gradually removed, partly alleviating the cost pressure of enterprises. The cost index of SMEOI has been rising for three consecutive months.

A bigger concern is that the expectations of MSEs have weakened as the expansion index and confidence index of most industries and regions have declined. The chronic lack of demand affects the future expectations of enterprises, while the reduction in investments and new employees may lead to a real recession in the future.

In addition, MSEs still face difficulties in collecting past due accounts receivable. In December, the risk index of SMEOI remained the same as the previous month. There were no positive changes in the working capital turnover and payment collection cycle in most industries. Based on the PSBC survey, at present, 85.90% of MSEs have accounts receivable, while 19.32% of MSEs complain that the collection period for accounts receivable extended in 2021. Obviously, many large enterprises still default on payments to MSEs. Under the circumstance of insufficient demand, MSEs easily fall victim to delayed payment, especially when the counterparties are large enterprises with dominant market position. After the issuance of the Regulations on Payment Protection for Small and Medium-sized Enterprises by the State Council in July 2020, the problem of late payments by government agencies, public institutions and state-owned enterprises has been somewhat alleviated, but little improvement is found between large private enterprises and micro, small and medium-sized enterprises in this regard.

From the above analysis, lack of demand is still the biggest constraint for MSEs, which leads to risks of accounts receivable and weakening expectations. China has maintained a very high household savings rate, and the short-term impact of the epidemic on the income is limited. But if lack of demand continues, enterprises could get into a vicious circle. In the long run, innovation is the key to development. The PSBC survey also shows that increasing investment in innovation is top on the agenda of MSEs in 2022, although it is difficult to produce results in the short term. Therefore, there is an urgent need to introduce policies to remove the impediments in the short term so as to facilitate demand recovery. Targeted measures shall be adopted to solve the problems of supply, accounts receivable and weakening expectations.

To alleviate demand shortage, suggestions are to gradually relax travel restrictions on mobility while continue to promote vaccination and epidemic prevention and control with the help of big data. At the same time, ease the control over some industries to facilitate a smooth transition of the economy.

In respect of the supply problem, it is suggested to pursue the carbon peak and neutrality goals in a scientific and phased manner. To this end, we should exercise control over the conventional energy after the full development of the clean energy technology so as to ensure cost control and power supply in the short term.

With regard to the collection of accounts receivable, we should improve liquidity in the market and take targeted measures to eliminate late payments by large enterprises. Based on the Interim Measures for Handling Complaints on Ensuring Payment of Funds to Small and Medium-sized Enterprises issued by the Ministry of Industry and Information Technology on December 30, 2021, we could refer to provisions in the Anti-monopoly Law of the People’s Republic of China and set certain restrictions on large enterprises regarding payment to micro, small and large-sized enterprises by accounts receivable.

In order to boost expectations, we should continue to strengthen expectation management while stimulating demand, and maintain the tax and fee cuts and structural monetary policies for MSEs to enhance business and consumer confidence.

(The author is Associate Dean of National Institute of Small and Medium-sized Enterprises, Renmin University of China, and Professor at School of Economics, Renmin University of China)