Policy Suggestions for Boosting the Development of SMEs in the People's Republic of China

5.1 Promote the Shift of External Demand to Internal Demand for Export-Oriented SMEs

Sustainable growth in the PRC will require a very substantial shift from external to domestic demand, moving away from investment in export-driven growth to consumption-driven growth. Strengthening domestic demand will also strengthen the PRC's ability to weather fluctuations in global supply. Support policies for SMEs should also address demand concerns. These support policies would strengthen the local markets by improving domestic consumption ability. Furthermore, these policies should reinforce and encourage innovation in SMEs and lower the cost of innovation activities (Liang 2007).

5.2 Resolve Financial Difficulties of SMEs

The government should formulate policies to mandate that banks to lend to the SMEs, or provide good incentives for the banks to lend to SMEs willingly, and increase the ratio of bank loans to SMEs to at least 10%. In this light, financial institutions issuing loans to SMEs can be exempted from business tax. Relevant organizations and individuals transferring or leasing patents to SMEs can also be exempted from, or have a deduction of, business taxes (Gao 2008).

It is advisable and important for local governments at various levels to establish guarantee institutions and provide guarantees for SMEs using government funds to help them garner loans from financial institutions or issue bonds at the bond market (Gu 2008). First, the access to guarantee companies needs to be opened further with simplified approval procedures. Second, the scope of tax break policies for guarantee companies should be increased, reducing and exempting them from income tax. Third, the rate of risk provisions should be increased above the current rate of 30%. Finally, the risk decentralization and compensation system of guarantee companies and national re-guarantee institutions should be firmly established. However, the government should be careful to avoid a tendency to over-guarantee without considering the probability for repayment. The guarantee provision should be modest and increase the chances of hitting the optimal level of guarantee.

Commercial banks can make use of financial product innovation based on mortgage guarantees to help SMEs obtain bank loans (Li 2001). Proceeding from the scope of the entire industrial chain, banks can issue credit based on the comprehensive business chain and effectively inject funds into relevant enterprises according to the business's transactional relationships. This will allow banks to provide flexible financial products and services. In terms of modalities for financing the supply chain, the strength of creditability of core large enterprises can be utilized to help SMEs obtain financing from banks. This will lower bank exposure to loan risks to some extent.

Commercial banks should improve services for SMEs. First, the banks should, in light of SMEs' unique characteristics, have a department dedicated to the management of financing services for SMEs and set up a center for operation for SMEs credit business, with dedicated account managers for SMEs services. Second, in terms of enhancing the efficiency of loan approval, banks should simplify the approval procedure and combine the establishment of SMEs loan relationships, ratings, credit approval, and mortgage pricing into one basket service.

The government must also initiate capacity building support services for both banks and the SME sector. Banks must be capacitated such that they'll be able to lend not merely on the basis of collateral, but rather, on the basis of SME risk using several indicators. Concurrently, SMEs must receive assistance to make them more credit-ready. A multi-facetted approach must be employed, training SMEs to cover marketing, product development, efficiency, etc. This will positively impact their growth and development.

Financing channels for SMEs through the capital market must also be developed. It is necessary to expand the scale of the SMEs board at the Shenzhen Securities Exchange, accelerate and boost the Growth Enterprise Market (GEM), improve the fostering mechanism for the listing of SMEs, and encourage various business startup institutions to strengthen investment for SMEs, especially innovative SMEs. It is important to encourage local governments to issue collective bonds to SMEs so as to effectively expand their direct financing channels. The SMEs Development Fund and the SMEs Innovation and Investment Fund must also be established.

5.3 Complete the SME Sector Policy Framework for Benign Business Environment

A benign business environment is usually a key determinant for the development of SMEs. Evaluation of this environment includes barriers to entry and exit, property rights protection, contract enforcement, and the functioning of the public service system.

Several steps can be taken to reduce SMEs' tax burden. These are:

• Encouraging the establishment of SMEs. It has been suggested that investors establishing SMEs should be exempted from tax based on 40% of the prescribed sum of investment.
• Reducing SMEs' fees and expense burden. Currently, SMEs' burden in taxes and surcharges is excessively heavy, and therefore it is necessary to abolish all unreasonable fees and charges to create an easy and relaxed environment for SME development.
• Accelerating the promulgation of tax breaks for SMEs in a special period. It is necessary to further raise the tax threshold for small-scale taxpayers, from the current CNY3,000 to CNY5,000 so as to help them pull through.

SMEs' ability for self-construction can be strengthened as well. This can be done by:

• Strengthening technological innovation capability.
• Strengthening financial management, improving financial systems, and enhancing credit grading.
• Building brand awareness to enhance competitiveness. The global financial crisis is a good opportunity for corporate upgrading, and SMEs must be responsive to updating products, developing new products, and building their own brands on an active and constant basis.
• Boosting the construction of SMEs credit systems for further market development.

The government should also improve the public service system for SMEs. To do so, the government must:

• Accelerate the construction of bases for small enterprises business startups, lower business startup costs, enhance advisory service capabilities for business startups, and support SMEs in various industrial parks and zones.
• Organize and boost technical service resources to provide support and services for SMEs' industrial upgrading.
• Improve commercialized services for SMEs. It is necessary to boost allies and mergers of SMEs, develop supplementary industrial and product chains based on large industries and key projects, and enhance the subcontract capability of large enterprises. It is important to implement the planning for SMEs service systems well, and to strengthen credit guarantees and services. Technological innovation services, business startup training services, market development services, and management advisory services must also be implemented so as to accelerate the establishment and improvement of a commercialized service system for SMEs.

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