Supporting SMEs the right way in a time of crises
Small and Medium Sized Enterprises contribute around 50 percent of China’s tax revenue, generates 60 percent of GDP, and employs 80 percent of the urban labourforce. These companies are also the ones suffering the most during the epidemic. This article focuses on the difficulties faced by these companies at present and puts forward a range of policy suggestions to help them overcome near-term capital shortage and long-term structural problems.
The problems at present
Since the outbreak, central government and local governments have carried out a range of multi-level policy arrangements, but the production and operation of private enterprises is still not optimal. Small and medium-sized private enterprises have long been mired in difficulties. With cost and financing pressure, restricted innovation abilities, internal governance and many other problems hurting the SMEs, structural pressures have been mounting for years. After the outbreak, the pressure on private SMEs have increased sharply. The problems are reflected in the following points:
One, capital pressure is high, and the risk of transmission has increased. The income of private enterprises has decreased sharply, but the rigid expenditure still exists. Most of the private enterprises are basically stuck in a no-revenue generating scenario, with idle personnel still needing wages. Rent, wages, insurances and the like still needs to be doled out. Private enterprises, especially SMEs, are mostly light asset enterprises. If production does not recover, the cash flow of most enterprises will not last for a quarter, or even a month. The capital problem is urgent. In addition, the private enterprise's capital problems might travel up and down the supply chain affecting SMEs of high and low.
Second, there are still issues with discrimination and poor transmission in the credit rescue policies. For a long time, private enterprises have contributed more than 60% of GDP, while only accounting for 40% of the loans, of which SMEs account for less than 10%. During the epidemic, private enterprises are facing a more severe survival test than state-owned enterprises. Although the government has issued policy guidelines to help enterprises through targeted credit support, banks, as the main body of the credit supply, have low risk preference under the policy requirements of preventing systematic risks, and private enterprises, especially those facing the possibility of bankruptcy, often have difficulties obtaining loans due to the high risk carried. Loans go to companies with relatively good credit rather than those most in need of the finances.
Third, the effect of tax reduction and fee reduction in dealing with the epidemic is limited. During the epidemic industries have been negatively affected to varying degrees. The film, tourism, offline entertainment and offline education industries have basically been suspended. Catering, transportation and construction industries are severely restricted in doing their work, and the fast-moving consumer goods, real estate, agriculture, forestry, animal husbandry and fishery have been severely impacted. In order to hedge the negative impact, tax relief policies have been issued in many places, but many private enterprises have limited benefit to these tax exemption due to their extremely low revenue, and close to zero tax burden during the epidemic. Delaying the payment of social security for one month will also only have limited impact. The base for social security payments in China is adjusted annually - even if the enterprise temporarily reduce the salary of personnel to get through the difficulties, social security payments are still calculated by the previous amount, and the one month delay period will have put pressure on private enterprises.
Fourth, controlling the epidemic has led to supply chain-clogs by limiting the flow of materials and restricting personnel travel. In addition to Hubei Province, many provinces and cities have arranged to resume work, but the prospect of a full capacity recovery is not bright. Materials wise, in order to prevent the spread of the epidemic, there are strict traffic controls put in place and all freight vehicles from other provinces are advised to stay within their home locality. In terms of human resources, the retuning tide of travelers this year has been pushed back. In addition, many medical observation and isolation measures have been implemented for the returned peoples for up to 14 days. As of writing, it is estimated that only 30-40% of employees are in place.
Helping private enterprises through the right mix of policy support
The current epidemic, in combination with the long-term structural problems, is putting a strain on industry. At current, due to the financial deficit limitation, there is little room for implementing a direct rescue of small and medium-sized and micro enterprises through the government financial means alone. We should thus rely more on financial means other than the public finances. We need to realize the prevention of an economic downturn with financial stability in mind. The policies should be adjusted to fit the existing policy system to form a multi-party response mechanism for emergencies.
First, the State Administration for Market Supervision, the State Administration of Taxation, the Ministry of Commerce and other departments should deploy special standards for guiding the rescue.
Under the premise of limited rescue ability, it is important to identify enterprises effectively in order to achieve efficiency. The first step on this path must be to identify enterprises with high productivity, which meet the needs of the economy and high-quality development set forward in policy for the past decade. Second, small and medium-sized micro private enterprises with high employment should be given priority. Third, priority should be given to enterprises in key industries with high degree of operating pressure. Fourth, enterprises with better tax payment and social security payment history should be prioritised. In the process of formulating the relevant standards, the proportion of industry funds and the order of policy support should be determined according to the industry benefits and other factors. Financial and fiscal support should be provided to enterprises with consideration given to economic, social and environmental benefits.
Second, The Ministry of Human Resources and Social Security, the National Council for Social Security Fund and other departments should aim to reduce and suspend payment requirements.
The amount of social security expenses (“五险一金”) will not change because of the epidemic situation, so the adjustment of personnel wages will thus remain large. If a delay in these obligations on enterprises is decided, it will reduce the burden on enterprises. This is encouraged. But any relief and suspension of social security commitments should not affect the future treatment and pension of employees. It is necessary to ensure that the insured employees can continue to enjoy social insurance treatment. The funding gap in the social security account can be made up once production has recovered.
Third, the People's Bank of China, the China Banking and Insurance Regulatory Commission and other departments should increase the money supply for small and medium-sized private enterprises and guide bank credit
In order to help enterprises cope with the situation of small capital buffers, the central bank should consider reducing the targeted standard of small and medium-sized banks, releasing the constraints on liquidity between banks, and help enterprises that have difficulties in acquiring loans. They should relax the short-term risk prevention and control requirements of financial institutions, appropriately and conditionally, that prevents financial institutions from taking out loans, suppressing loans and other behaviors during the epidemic period. They should take the initiative to increase rescue loans and reduce and exempt interest rates, so as to help private SMEs fight the epidemic; in addition, they should implement special credit policies and preferential policies, such as reducing credit requirements, optimizing the loan review process, and decentralize the credit approval structure.
Four, the CBRC, the People's Bank of China and other departments should guide commercial insurance institutions to issue special sustainable risk sharing products.
For example, when the epidemic situation is more severe, they should create commercial insurance tools specifically for the solving the problems of SMEs. They should develop business interruption insurance and cancellation insurance products for public health emergencies. If the epidemic lasts for a long time, it will cause a large number of SME to face liquidity risks, which will lead to an increased default rate in the financial market and the accumulation of credit risk.
However, the Chinese financial market lacks financial instruments to cut, disperse, transfer and package credit risk. Therefore, we suggest the creation of a commercial insurance instrument specifically aimed at the credit problems of SMEs, making it clear that the central bank will provide the ultimate liquidity support. For the risk management of public health emergencies, especially in the areas where the current epidemic has had less impact, we should develop products and establish corresponding technical and service standard systems for productive and service enterprises.
Five, The Ministry of Finance, the Ministry of Human Resources and Social Security, the National Council for Social Security Fund, the Banking and Insurance Regulatory Commission and other departments should study and form a multi-party risk sharing mechanism for the government, employees, enterprises and insurance companies to handle this and future public health events.
Earthquake, typhoons, epidemics and other force majeure events will have a significant impact on the production and operation of enterprises this time around and in the future. While gradually establishing the macro level emergency system, we should also implement the relevant emergency system for the economic calamities. Operations of a single enterprise is related to local industrial policy arrangement, upstream and downstream support in the supply chain, financial and tax payments, employee security and other aspects - these considerations should be considered grouped in a supra-institution to find the best fit for each disaster in every geographic locality.