How China can ensure critical aid gets to the small firms that are the lifeblood of its economy

To encourage banks to lend to micro, small and medium-sized enterprises, Beijing can back the loans and ease tolerance for bad debt. It can also borrow from the US playbook by enlisting big data and AI in targeting relief distribution

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A vendor at Xisi Night Market, in Henan’s Kaifeng city, on June 1. China’s small businesses are a vital engine of economic growth, and they are faltering. Photo: Imaginechina

Published: 3:30am, 3 Aug 2020Updated: 3:44am, 3 Aug 2020

China’s biggest companies make the headlines, but its 30 million or so smaller businesses are what really makes the economy tick. This engine of growth is stalling, though, as Covid-19 leaves a trail of economic destruction in its wake. Government efforts to save China’s smaller businesses – and their workers – would benefit from the application of big data and artificial intelligence, and from taking a leaf from the US crisis playbook.

The importance of micro, small and medium-sized enterprises (MSMEs) to the Chinese economy is so great that they are often referred to as the “Five, Six, Seven, Eight, Nine”. This is because they account for 50 per cent of tax revenue, 60 per cent of gross domestic product, more than 70 per cent of innovation, 80 per cent of urban employment and more than 90 per cent of all companies.

But these businesses are hurting in the wake of the Covid-19 pandemic, which shut down sectors and regions for months and affected consumer and business confidence. The economic fallout is unprecedented for modern China: the Fudan-Ping An Research Institute for Macroeconomy expects China’s GDP growth to fall to a 40-year low of minus 1.5 per cent to 3 per cent this year.

MSME revenue as a whole sank by more than 50 per cent in the first quarter, when the outbreak was at its worst in China, sapping demand and restricting production at the same time. All businesses suffered in this environment, but the extent and manageability of the impact has naturally been influenced by company sector and size.

In the sectors most heavily affected by restrictions on travel and gathering – such as education, hospitality, culture, sports, entertainment and manufacturing – turnover in February and March was just 10-40 per cent of the same period last year. That 70 per cent of China’s manufacturing workforce is employed in enterprises with fewer than 400 workers makes clear the implications of this slowdown on livelihoods, a key priority first outlined at the 13th National People’s Congress.

And while large companies often have the reserves and access to bank lending necessary to weather unexpected shocks, MSMEs lack those kind of buffers. Indeed, some may still be facing severe liquidity problems after the shutdown during the first quarter, from which nearly half a million Chinese firms never recovered.

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