China’s vulnerable small businesses have had it up to arrears – they need to be paid as policies fall short, survey finds
- Shrinking market demand and outstanding billables continue to plague small and micro-sized Chinese firms, leaving struggling owners feeling lost at sea
- Reports of unsustainable cash flows are rising, threatening sector that is considered vital to employment as debt concerns mount
China’s small businesses say shrinking market demand is their biggest pain point, while payment delays are also compounding the challenges facing their daily operations, according to recent findings by Peking University.
The results, based on a survey of 9,252 small and micro-sized firms across the country in December, reflect how the country’s beleaguered economy has yet to elevate the employment-vital sector to its pre-pandemic levels.
“A significant factor contributing to the operational challenges of small and micro-sized enterprises is the substantial proportion of outstanding receivables,” said the quarterly report, which has been tracking the operations of small businesses since 2020.
Among the surveyed enterprises, 71 per cent reported having outstanding receivables, with construction and manufacturing industries being most seriously affected.
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The average value of arrears reached 103,000 yuan (US$14,300), representing around two-thirds of the quarterly income for small and micro-sized businesses.
Failing to receive timely payments, which the report largely attributed to high debt levels among local governments, has led to “insufficient cash flows and disruptions in the supply-chain funding”, and businesses said this was “exacerbating their operational challenges”.
The percentage of small and micro enterprises reporting unsustainable cash flows saw a slight increase to 10.8 per cent in the last three months of 2023, up from 9.9 per cent in the third quarter, the report said. Meanwhile, the proportion of enterprises whose cash-flow sustainability had dwindled to less than one month rose from 20.6 per cent to 30.4 per cent.
The virtual survey was conducted in collaboration with MYbank, the online bank backed by Ant Group, an affiliate of Alibaba Group, which owns the South China Morning Post.
Although the classifications for business sizes differ between industries, in the case of retail enterprises, 10-50 employees and annual revenue of 1 million to 5 million yuan classify them as small enterprises, while those with fewer than 10 employees and less than 1 million yuan in annual revenue yuan are considered micro-sized.
“When state-owned enterprises or developers delay payments for our projects, it creates a domino effect where we, in turn, are unable to settle our debts with downstream suppliers,” said Mason Deng, who operates a construction company with more than 20 employees in Wuhan, Hubei province. “Without seeing effective measures to address overdue payments, many businesses are reluctant to take risks.
“Some companies, even if they’re willing to take on projects, face the risk of getting stuck in a rut if those payments keep dragging on.”
The long-standing issue of late payments plaguing the private sector has worsened over the past few years amid an economic and real estate downturn, prompting Beijing to roll out several rounds of campaigns to spur repayments.
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But Deng said that business owners like him still “feel at sea”, as they have not seen the central policies effectively implemented. And he added that he had not observed any cases in which penalties were imposed due to payment arrears.
Sustained weakness in market demand also continues to haunt small and micro-business operators, with more than 52.4 per cent of the small businesses citing it as a pressure point, up from 50.1 per cent in the quarter before, according to the survey.
The confidence index of small business operators for the first quarter of 2024 was 49.3 per cent, down by 1.2 percentage points on a quarterly basis, and the survey showed that figures concerning market demand and business revenue were down-trending the most.
Consumers’ pessimistic outlook and structural mismatches between supply and demand have led to household consumption falling short of expectations, which has “directly contributed to small and micro businesses’ operational difficulties and increasing focus on costs”, the report said.
“We’re receiving fewer orders. Our turnover is only about half of what it was before the pandemic,” said Lin Jianbo, who runs an auto-repair store in southeastern Fujian province.
Small and micro-sized enterprises … act as the capillaries of the national economy
He said corporate orders accounted for the bulk of his clientele, but because their profitability has taken a hit, so has Lin’s business, which is facing more delayed payments.
“Now, the only way to survive is to reduce costs,” said Lin, who has moved his store to a more affordable area and is offering fewer services to save on labour costs.
The Peking University report called for supportive measures aimed at “addressing the root causes” of weakening demand and the substantial outstanding receivables hindering small businesses.
“Small and micro-sized enterprises serve as a reservoir for employment in our country and act as the capillaries of the national economy,” it said.
It suggested that the central government should launch favourable policies for low-income groups with higher consumption flexibility to boost consumer confidence and address debt issues through fiscal measures, such as issuing long-term bonds.
