Impacts of the 1997 Asian Financial Crisis on SMEs in the People's Republic of China

2.1 Impacts of the 1997 Asian Financial Crisis on the PRC's Economy in General

In 1997, the PRC's economy was not highly dependent on the outside world yet the Asian financial crisis still had strong impacts on it. During the crisis, the PRC experienced a slowdown in terms of its economic growth, export growth, and the growth rate of all societal fixed assets investment.

Due to the increasing globalization of the world economy in the late 1990s, the Asian financial crisis greatly reduced the rate of economic development of the global economy, thereby strongly affecting the growth of the PRC economy as well. As shown in Figure 1 [ PDF 40.9KB | 1 page ], the growth rate of the PRC's economy was 9.6% in 1996, 8.8% in 1997, 7.8% in 1998, and 7.3% in 1999. Domestic economic growth gradually regained momentum after the PRC government adopted a series of effective measures, such as boosting domestic demand, which resulted in a rebound in the growth rate to 8.0% in 2000.

Export growth in the PRC slowed as a result of the Asian financial crisis. As shown in Figure 2 [ PDF 40.9KB | 1 page ], the export growth rate was large in 1997, however this was an artificial effect resulting from preexisting export orders. In 1998, though, the rate of export growth was only 0.5%, which was almost stagnant. The onset of the financial crisis directly resulted in the reduction of exports, which was further compounded by the insufficient internal and external demand that followed due to the multiplier effect of trade. This also adversely impacted SME business operations, and demand for products produced by export-related enterprises fell accordingly. In 1999, the export sector began to regain its strength.

The Asian financial crisis also resulted in a slowdown of fixed asset investment in the PRC. As shown in Figure 3 [ PDF 34.3KB | 1 page ], in 1996 the growth rate of fixed asset investment was 14.8%, but it fell to 8.8% in 1997. Due to stimulative PRC policies, such as proactive fiscal policy, fixed asset investment rebounded to 13.9% in 1998, but then declined to 5.3% in 1999. In 2000, it recovered to 10.3%.

2.2 Impacts on SMEs in the PRC

In terms of the indicators for all private enterprises, such as employed staffs, registered capital, retail sums of consumption goods, and export growth rate, there was a significant decline in 1997 compared to 1996. Although there was a great rebound in 1998, a decline appeared again in 1999. As shown in Figure 4 [ PDF 68.4KB | 1 page ], the impacts of the Asian financial crisis on the PRC's SMEs lasted for three years.

2.2.1 Fluctuations in the Growth Rate of the Number of Enterprises

As shown in Figure 4 [ PDF 68.4KB | 1 page ], the number of small and medium private enterprises in the PRC in 1996 (820,000 SMEs) grew 25.2% over the previous year. In 1997 (960,000 SMEs) the growth rate dropped to 17.3%, and then in 1998 (1.2 million SMEs) the growth rate rebounded to 25.0%. Finally, in 1999 (1.5 million SMEs) the growth rate again dropped to 20.5%. Similar trends were also true of micro-small private enterprises. Figure 5 [ PDF 68.4KB | 1 page ] shows that for the growth rate of related economic indexes for micro-small private enterprises, in 1996 (27.04 million SMEs) the growth rate was 7.0%, whereas in 1997 (28.51 million SMEs) the growth rate declined to 5.4%. In 1998 (31.2 million SMEs), the growth rate reached 9.5% and in 1999 (31.6 million SMEs) the growth rate dropped to 1.3%, a very significant decline. Due to the smaller size of micro-small private enterprises (having less than 8 people in such organizations) this category experienced relatively large fluctuations.

2.2.2 Fluctuations in the Number of Employed People

Figure 4 [ PDF 68.4KB | 1 page ] shows that the growth rate of people employed by small and medium private enterprises was 22.5% in 1996 (11.71 million people), 15.2% in 1997 (13.49 million people), 26.7% in 1998 (17.09 million people), and 18.3% in 1999 (20.22 million people). In terms of the number of employed people in micro-small private enterprises, as shown in Figure 5, in 1996 (50.17 million people) the growth rate was 8.7% and, similarly, in 1997 (54.42 million people) it was 8.5%. In 1998 (61.14 million people) the growth rate increased to 12.36% and then in 1999 (62.41 million), the growth rate dropped to 2.06%. Thus it is evident during the period from 1996 to 1999 that the number of people employed by micro-small private enterprises was far greater than that of small and medium private enterprises. Due to their stronger market sensitivity, micro-small private enterprises were more vulnerable to policy adjustments.

2.2.3 Fluctuations in Investment Growth Rate

Figure 4 [ PDF 68.4KB | 1 page ] shows the registered capital of small and medium private enterprises from 1996 to 1999. In 1996, registered capital was CNY375.2 billion, an increase of 43.1% over the previous year. The growth rate then fell in 1997 (CNY514 billion) to 37.0%, but recovered in 1998 (CNY719.8 billion) to 40.0%. Finally, in 1999 (CNY1028.7 billion) the growth rate was 36.3%. Comparatively, Figure 5 shows that the growth rate of registered capital of micro-small private enterprises in 1996 (CNY353.9 billion) was 21.6%, 18.8% in 1997 (CNY257.3 billion), 21.2% in 1998 (CNY312 billion), and 10.2% in 1999 (CNY343.9 billion). During the startup phase, business owners, entrepreneurial teams, and their families provided over 90% of funds for these SMEs. The efforts to support SME growth and development from the financial sector were not great in the PRC. In 1997, loans garnered by all private enterprises accounted for only 2.3% of the total bank loans. Even in Jiangsu Province, where all private enterprises were developed relatively well, the ratio of the balance of their bank loans to the various types of loans was only 4.8% in 1999, and in 2000 the ratio only slightly increased to 5.2%.

2.2.4 Great Fluctuations in the Growth Rate of Production and Operations

In 1996, the production value of small and medium private enterprises was CNY322.7 billion, an increase of 40.6% over the previous year. Growth rates the subsequent years were 21.6% in 1997 (CNY392.3 billion), 49.2% in 1998 (CNY585.3 billion), and 31.3% in 1999 (CNY768.6 billion). In 1996, the production value of micro-small private enterprises was CNY353.9 billion, an increase of 26.8% over the previous year, CNY455.3 billion in 1997, CNY596 billion in 1998, and CNY706.3 billion in 1999.

The retail of consumption goods is also significant. In 1996, the retail of consumption goods by small and medium private enterprises was CNY145.9 billion, an increase of 45% over the previous year. Growth fluctuated in the years that followed, with an increase of 21.7% in 1997 (CNY185.5 billion), a sharp increase of 65.0% in 1998 (CNY305.9 billion), and maintained a steady 37% increase in 1999 (CNY419.1 billion), a great drop compared to 1998. In 1996, the retails of micro-small private enterprises totaled CNY670.6 billion, an increase of 25.2% over the previous year. In 1997 (CNY807.4 billion) the growth rate was 20.4%, followed by a 21.1% increase in 1998 (CNY978 billion), and an increase of 22.9% in 1999 (CNY1200 billion). Clearly, private enterprises were encouraged by the rapid growth of production values, especially micro-small enterprises since their production values were generally the same as those of SMEs and their sales several times more than those of SMEs. Consequently, micro-small enterprises were fast in responding to the market and able to make quick adjustments.

2.2.5 Significant Downturn in Export Growth in 1998

The exports of SMEs were also affected by the crisis. Figure 6 [ PDF 38KB | 1 page ] shows the growth rate of trade for all private enterprises in the PRC from 1996 to 1999. The trends in the figure show that impacts of the financial crisis on the exports of SMEs were consistent with the trend of affected PRC exports in general. Both had a dramatic downturn in exports in 1998, which began to rebound in 1999 and continued to rebound in 2000. International markets significantly affected export demand, which reached its lowest point in 1998. Thereafter, it rapidly rebounded and kept its growth momentum. An analysis of the relationship between the private economy and international markets in 1997 and 1998 shows 61.5% of the enterprises regarded other domestic private enterprises as competitors, according to the results of the 4th National Private Enterprises Sampling Survey (PRC Industry and Commerce Association 2007).¹ Compared with the direct impacts of international markets on all private enterprises, domestic policy adjustments had stronger impacts on private enterprise. The impacts of the Asian financial crisis in 1997 on SMEs also reflected this situation.

2.2.6 Low Level of Creditability

It was generally reflected in the survey of private enterprises that the most perplexing issue was that of SME credit detection. According the survey, a significant number of entrepreneurs felt vexed at the low level of creditability of the whole society (Ding 2001). Therefore, it was necessary to make systematic adjustments in terms of laws, systems, and management mechanisms to improve societal access to credit.

2.3 Policy Response of the Government of the PRC to Cope with the Asian Financial Crisis

In order to cope with the Asian financial crisis in 1997 and prevent and defuse financial risks, the PRC government urgently needed to boost internal demand and increase the money supply. Under such circumstances, the PRC adopted a proactive fiscal policy and a prudent monetary policy. As a result, significant achievements were made in terms of handling the crisis and its impacts on the PRC economy.

2.3.1 Proactive Fiscal Policy

Strengthening fiscal investment became an important means of coping with the crisis and stimulating economic growth. First, the government issued additional state bonds for long-term construction. In 1998 CNY100 billion in special state bonds were issued, which effectively boosted the supplementary funds and bank loans for localities, sectors, and enterprises. In response to the situation at that time, funds were mainly channeled to the construction of infrastructure and played an important role in stabilizing the economy. Second, in 1998 the total sum of fixed asset investment in the PRC was CNY2.85 trillion, an increase of 14.1%, of which CNY1.57 trillion was invested in the state economy, an increase of 19.6%. Third, the PRC government also began investing in expressway construction to stimulate internal demand. Under the then economic conditions, highway construction was characterized by a short construction period. In 1998, internal demand was significantly boosted by the large scale of investment in expressway construction, and resulted in a strong momentum of economic growth.

2.3.2 Prudent Monetary Policy

Efforts to adjust PRC monetary policy were great, and many of the adjustments were put in place in a timely fashion. First, the government down-adjusted the required reserve ratio from 13% to 8% in March 1998, a down-adjustment of five percentage points. Second, interest rates were lowered. Various deposit and loan interest rates were reduced, with some annual deposit rates being lowered by 0.16 percentage points and several annual loan interest rates dropping by 0.60 percentage points. This met the demand for loans from the enterprises and greatly stimulated the economic growth. Third, the government lifted the restrictions on the scale of loans so as to give commercial banks full independent rights for issuing loans. Fourth, the central bank increased the money supply through the expansion of open market operations. In 1998, market operations were expanded six times with an investment of base money of CNY70.1 billion. In 1999, CNY192 billion in base money was issued, accounting for 52% of the additional base money of the year. Fifth, government policy established that the yuan would not appreciate and the exchange rate was to remain stable.

2.3.3 Continuous Support Policy for SMEs

Management systems for SMEs in the PRC began to change with the increasingly improved external environment. Instead of a situation where there was strong desire but weak capability to handle SMEs, circumstances reversed with an influx of capable management.

In 1998, the SMEs Department was set up in the State Economic and Trade Commission, and the Bureau of Small and Medium Enterprises was also established in 21 provincial governments around the country.

In 1999, the legal position of the private economy was further defined with SME-related laws such as the Partnership Enterprise Law and Sole Proprietorship Enterprise Law.

In 2001, the government issued six documents that strengthened SME institutions and regulations. These documents streamlined SME establishment and approval, established measures for managing the SME financing guarantee industry, improved SME credit guarantee systems, outlined the implementation of business tax exemption for SME guarantees and re-guarantees, strengthened SME quality management, and improved SME credit management (Yao 2004).

In 2003, the Interim Regulations on Standards for Small-and-Medium Enterprises was promulgated, which promoted an accurate definition of an SME.

2.4 Evaluation of PRC Government Policy Responses for Coping with the Crisis

In order to cope with the financial crisis, the PRC government proceeded with macro controls in a timely fashion by using both fiscal and monetary means to stimulate investment and boost internal demand, which mitigated the impacts of financial crisis. Although there was a downturn in SMEs in 1998, their various indicators maintained relatively high growth rates. After 2000, the PRC economy regained its momentum and resumed its rapid growth. The PRC managed to maintain a stable economy and stability in the yuan exchange rate, thus avoiding some of the more severe impacts that hit the Asian economic region and allowing the PRC economy to play an active role in stabilizing the world economy.

Although the fiscal and monetary policies issued by the PRC government were not directly related to SMEs, SME development was closely related to the PRC's domestic markets. Because the fiscal and monetary policies stimulated the growth of the PRC economy as a whole, a positive economic environment was created for SME development and lasted over the next several years.

W-shape fluctuations appeared during the Asian financial crisis and are evident when analyzing the impacts of the crisis on SMEs. Because supportive SME policies were well in place in 1998, SME performance rapidly rebounded that year following the sharp decline in 1997. However, performance declined again in 1999, exhibiting the trends associated with the W-shape pattern. This showed that there was a lack of continuity in the crisis countermeasures, which is a relevant concern for future crises.

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