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The Rupp Report: China Is Discovering Its Small And Medium-Sized Enterprises

Jürg Rupp, Executive Editor

Some people think that China is not only a country, but also a big factory. Especially in textile production, China has the image of being a land of extremely large companies with tens of thousands of employees in every factory. For the last two decades, this image has been nourished by the fact that customers from the West could only order big or very big quantities of textile products; and consequently, the exports from China flooded over the globe.

On the other hand, in Western countries, textiles are still a business of more small and medium-sized enterprises (SMEs). An excellent example is Italy, particularly the Italian textile machinery industry. According to information from the Association of Italian Textile Machinery Manufacturers (ACIMIT), most of the 150 member companies are small and medium-sized, very straight-thinking companies, working for many generations in the same business.

New View In Sight
This up-to-date orientation toward "only big is beautiful" could change soon: The recent small dent in the textile industry and other business sectors of the Middle Kingdom shows also a current trend to smaller lots and more flexible production. This was and is the chance for neighboring countries to take some business away from China to other small tigers around the big tiger nation. Some days ago, is was officially announced that China's Cabinet is willing to provide more support to small and even micro-sized businesses through increased financing innovation and credit for the private sector.

Eight Targets
The State Council has released eight detailed targets and explains that the credit growth rate for SMEs cannot be below the national average lending rate. At the same time, the gradual amount shouldn't be less than the amount that was borrowed last year. On this subject, Tan Yaling, head of the China Foreign Exchange Investment Research Institute, made a remarkable comment: she said that "policy makers have made a point of reiterating the policies to show the government's resolution in supporting small and micro-sized businesses." She added that all eight targets, or policies, have already been issued.

These targets include the recent doing away with the value-added tax for businesses whose monthly revenues fall below 20,000 yuan, among other steps. However, Tan emphasized the most important issue for small Chinese companies is credit access. Many Chinese banks do not want to provide loans to companies if interest payments won't provide a large return. However, this is not only a problem for SMEs in China, but in Western countries as well.

In most businesses, communication is the key word. Of great importance, Tan said, is to coordinate the interaction between small financial institutions and SMEs. As she pointed out: "Financial institutions over the course of their developments have not addressed the SME financing woes or just ignore their demands. This time the State Council has specifically cited small financial institutions to tackle the problem faced by SMEs." This is quite a clear statement.

And the next move, which is very well-known in the Western banking world, is to request that private banks, financial leasing enterprises and consumer financial companies establish branches in locations near concentrations of small businesses. In addition, policymakers have promised make greater efforts to ensure that small businesses are not hit with "unreasonable charges."

Reshuffling The Cards
Many of the above-mentioned details and problems could also be tackled in the West; for example, "unreasonable charges" by the banks sounds very familiar. The recent economic slowdown has led the Chinese government to turn its attention toward small business expansion as it tries to increase domestic demand and employment. Chinese officials have probably realized that SMEs are still the pillar and cornerstone of a healthy economy.

It may be surprising to Western people that 99 percent of Chinese companies are small or medium-sized enterprises. And furthermore, they account for 80 percent of all jobs in cities and 60 percent of the country's economic output.

The shift in Chinese financial policy is quite remarkable and could activate the business environment in the Asia-Pacific Rim. It may reshuffle the cards of competitiveness among countries in the region when it comes to entrepreneurship, flexibility and just-in-time delivery in the Chinese textile industry.

August 20, 2013