Nation's small traders squeezed dry

PUBLISHED : Friday, 20 January, 2012, 12:00am
UPDATED : Friday, 20 January, 2012, 12:00am


Zhang Zhenfeng, who owns a street-side photo-print shop in Beijing, says he has never been happier with business conditions than in the past couple of months.

'I used to pay a monthly tax of some 800 yuan (HK$983). And it was a fixed rate,' he said. 'I had to pay it whether I had business or not. Now I just have to pay around 100 yuan.'

It is the first tax cut he has seen since opening his shop eight years ago and a welcome boost for small businesses, who have been struggling recently, 20 years after they first flourished following their endorsement by Deng Xiaoping, the 'chief architect' of reform and opening up.

Another small-business owner in the capital, who runs a hair salon, said his monthly tax bill fell to less than 100 yuan from 750 yuan.

He said the central government's tax cut, designed to help the mainland's struggling small enterprises, was almost too good to be true. 'It is completely out of character for the government,' he said. 'Before, it seemed ready to grab everything you had.'

But Zhang said he had heard rumours that officials were planning to make up their lost revenue through other taxes. 'I don't think they will leave us alone like this for long,' he said.

Zhang said 'micro-enterprises' - those with fewer than 50 staff - had been given even greater tax cuts than the self-employed. But he was not interested in changing his business status.

'You may get better terms for tax and loans,' he said. 'But registering a business is still a much greater hassle.'

When Deng visited Shenzhen in January 1992 on his famous southern tour, private companies owned by mainlanders accounted for only a small fraction of the economy.

At the time the mainland was torn by arguments about whether further opening up was the path to capitalism or socialism. Private business came under particular scrutiny because the ownership of property had been regarded as the boundary of the two ideologies.

Figures from the All-China Federation of Industry and Commerce show there are now more than 9 million private companies on the mainland, with another 36 million self-employed business people who are treated as a separate category in official statistics.

However, the growth of private enterprise may be running out of steam.

The federation's vice-chairman, Quan Zhezhu, says private companies and sole operators are being threatened by higher costs, heavy taxes, tight credit and a lack of skilled workers.

The central government has issued many documents in the past few years - 44 last year alone - urging greater market access for private companies, but change has been slow.

Before the recent tax cut, a federation report said, some private companies paid more in tax than they made in net profit, and were also hit with up to 69 types of administrative levies and charges - from 18 government agencies - in addition to their tax bill.

In some provinces and municipalities, all the insurance payments that a company had to pay for a worker amounted to more than 40 per cent of the worker's wage, it said.

To make things worse, said Professor Li Yining, a Peking University economist who has long advocated the benefits of private entrepreneurship, the market situation is much more complex than at the start of the global financial crisis in 2008.

Energy and property prices have been rising, demand from Europe has declined and the exchange rate against the US dollar has grown more unfavourable.

But the biggest impact on private companies, Li said, was a lingering discriminatory effect of the central government's economic stimulus programme in 2009, which supported state-sector industrial monopolies with large doses of easy credit.

The federation report showed that because banks like to maintain close ties with the large enterprises, which are mostly state-owned, only about 20 per cent of small enterprises have been granted loans. It said that virtually no businesses with fewer than 50 staff had ever been granted a bank loan.

Even after some large, state-owned banks set up special branches for small enterprises after being urged to do so by the government, their programmes were still too rigid to meet the demands of most potential clients.

Nor can most small enterprises easily get credit from small banks at the village and township level, which are still in an experimental state and too few and too small to serve a large number of clients.

And even when they do extend loans, the interest rates they charge are three to four times higher than those for a loan from a large bank, the federation said.

With private companies' credit problems unlikely to go away soon, many economists have called for a quicker solution, such as tax cuts for small and medium-sized enterprises (SMEs).

But despite positive changes here and there, such as the recent tax cut, the government can still do much more to help SMEs, Hou Yunchun, a deputy head of the State Council's Development Research Centre, said last week, 'because 2012 will be a year of tough choices'.

The continuing difficulties in the global market require Beijing to keep its focus, and Hou hinted that the theme that Premier Wen Jiabao will announce at the annual session of the National People's Congress in March will be on 'guaranteeing growth'.

The driving force for mainland economic growth primarily comes from its SMEs, with Hou pointing out that they sustain jobs and their workers are consumers at the same time. SMEs also buy materials, generating orders for other enterprises.

A federation survey in 2010 found that SMEs accounted for nearly 80 per cent of all urban jobs, developed 75 per cent of all new technology, generated total revenue equivalent to 60 per cent of national gross domestic product and paid half of all taxes collected by government.


The Entrepreneur Confidence Index score for the third quarter of 2011, which was 7.4 points lower than a year earlier