PRC Government Policy to Cope with the Current Financial Crisis and Resultant Effects

In order to cope with the global financial crisis, the PRC government has shifted the mode of economic development, issued important measures for boosting internal demand, increased investment, stimulated consumption, and has practiced proactive fiscal policy and loose monetary policy so as to ensure the healthy and steady development of the economy. In 2009, the government put forward a target GDP growth of 8%. Currently, it appears the government's stimulative measures have been achieving this goal. It is projected that the PRC's economy will reach its nadir and rebound during the second half of 2009. To continue coping with the financial crisis and to assist the recovery of SMEs, the PRC government has taken a series of measures, which are explained in the following section.

4.1 Macroeconomic Polices

4.1.1 Expanding Government Investment

Toward the end of 2008, the PRC government began to practice proactive fiscal policy by introducing an economic stimulus package of CNY4 trillion in order to cope with the financial crisis. The CNY4 trillion is broken down into CNY1.18 trillion invested by the central government and CNY2.82 trillion invested by local governments. From historical data, we can notice that from 1998 to 2004, the Central government practiced the proactive fiscal policy for seven years, during which CNY910 billion in long-term construction bonds was issued. This stimulus plan boosted economic growth by 1.5–2 percentage points on a yearly basis during this period. In light of this, the investment of CNY4 trillion should boost economic growth by at least 2 percentage points. Investment structure focused on infrastructure. The central government has chosen 10 major measures for boosting internal demand, deciding that 60% of the total investment will be used to improve people's well being in areas such as medical care, education, and social security. This will not only stimulate the economic development, but also solve actual problems that currently afflict the PRC.

In 2009, the central government arranged for CNY908 billion for public investment, an increase of CNY487.5 billion over the budget in 2008. Also in 2009, the PRC's fiscal deficit will expand to CNY950 billion, the highest sum since the founding of the PRC. The ratio of the fiscal deficit to GDP will be controlled within 3%, and the deficit will be made up through increasing the issuance of state bonds. In 2009, the balance of state bonds of fiscal finance will be CNY6.27 trillion, which is CNY1 trillion more than the balance of state bonds of CNY5.33 trillion in the PRC in 2008.³

4.1.2 The Monetary Policy Increasing Credit Supply

According to the February 2009 Government Work Report (Wen 2009), in 2009 the target for loan increases was over CNY5 trillion, an increase of approximately 50% over the target of CNY3.6 trillion in 2008. It is also higher than the 2008 credit increase of CNY4.9 trillion for the banking industry. The central bank's statistics show that the newly increased credit in the first quarter of 2009 reached CNY4.58 trillion, an increase of CNY3.25 trillion year on year, or over three times that of the same period in 2008. The issuance of credit in March 2009 alone was as high as CNY1.89 trillion, a record high for the sum of increased credit in a single month.

4.1.3 Developing Industry Rejuvenation Plan

To boost internal demand, the PRC government developed a plan for rejuvenating 10 industries: iron and steel, automobiles, vessels, petrochemicals, textiles, light industry, non-ferrous metal, equipment manufacturing, electronic information, and logistics. These industries are national economic pillar industries, strategic industries, or important industries concerning people's well being. All play important roles in the national economy. The industrial value-added of the nine of these industries account for around 80% of the total industrial value-added and one third of GDP. In addition, taxes submitted by enterprises with annual sales of over CNY5 million account for 40% of the total tax revenue in the PRC, and the number of employed people account for about 30% of the total number of employed people by organizations in the urban areas of the country.

4.1.4 Stimulating Domestic Consumption

The PRC government has taken several actions to stimulate domestic consumption. First, it is expanding employment by increasing investment in the tertiary industry to enhance the average income of residents. This is intended to stimulate domestic consumption demand by improving personal ability for consumption (Li 2008). Second, the government is reducing the tax burden by increasing the tax threshold for personal income tax. Third, the government is taking action to control price hikes. Fourth, many actions have been taken to stabilize housing prices. In order to maintain stability in the real estate market and avoid the rapid decline of housing prices, housing prices were stabilized mainly through the market mechanism and adjusted by increasing the housing supply. A fifth action has been the reduction of automobile prices. Currently, the price of raw materials such as steel has declined, lowering the cost of vehicle production. Consequently, the cost of vehicles has dropped and the new highway construction should encourage traveling by automobile. Finally, the government has taken steps to stimulate rural markets. This stimulus has come in the form CNY40 billion in subsidies and is meant to facilitate the “Bringing Home Appliances to Farmers” program, under which enterprises benefit from increased sales while farmers receive improvement in their daily lives.

4.1.5 Developing the Social Security Plan

With regard to employment issues, the government has planned to invest CNY42 billion to implement a more proactive employment policy. This includes promoting the employment of university graduates, creating more employment opportunities for rural migrant workers, helping people with difficulty finding employment get jobs in urban areas, and supporting people seeking to find employment through entrepreneurship (Li 2008).

The government also has targeted medical care as an area for investment. The plan is for CNY850 billion to be invested by various levels of government (from central to local) to ensure the smooth implementation of medical and pharmaceutical institutional reforms. The reforms should work earnestly to resolve the problems in medical care such as improving facilities that are too expensive and too difficult to access for the average PRC citizen, thereby providing safe, effective, convenient, and inexpensive medical and health services for the people in the country.

The insurance sector is set to receive CNY293 billion in social security funding from the government to improve the basic old-age pension insurance system, greatly develop social welfare undertakings, and expand the coverage of social security.

In 2009, the government plans to invest CNY49.3 billion to create more economically affordable housing. The funds will support for the construction of low-rent housing and the revamping of shantytowns. Over the next three years, the state will invest CNY900 billion to strengthen the construction of welfare housing.

4.2 Support Policy for SMEs

In the first quarter of 2009, a tax break policy was promulgated in Guangdong, Jiangsu, and other provinces to support the development of SMEs. Specifically, this policy is aimed at providing tax preferential treatment to SMEs engaging in technological transfers, development, and services. For instance, the policy increased the ratio of deduction for research and development expenses, and technological and environmental protection enterprises will receive preferential treatment with regard to their income taxes.

The China Banking Regulatory Commission (CBRC) took a strategic view for strengthening the credit support of small enterprises and required that the five big state commercial banks complete the establishment of special service outlets of credit for small enterprises within the next five years, emphasizing that the growth of small enterprises credit should not be lower than the average credit growth (Jiang 2009).

To strengthen the credit guarantee system for SMEs, the government has issued policies for strengthening the credit support for SMEs (Zhao 2008). In 2009, an additional sum of CNY1 billion was allocated to the SME guarantee fund to further increase the guaranteeing capability of the institution and improve the development of guarantee and re-guarantee companies around the country.

The rapid development of small-sized financial institutions for rural SMEs in the countryside will also help SME development. According to statistics from CBRC, by the end of 2008 there were 89 village and township banks approved for operations around the country; by the end of September 2008 there were 144 small loans companies around the country.

In 2008, the main government policies for maintaining the stable development of SMEs included the following:

• Notice of National Development and Reform Commission Concerning the Printing and Distribution of Opinions on Promoting SMEs Informatization through Reinforced Services,
• Notice on Supporting and Guiding Credit Guarantee Institutions for Small-and-Medium Enterprises to Strengthening Their Services and Mitigating SMEs' Difficulty in Production and Operations,
• Notice of the Ministry of Finance and the State Administration of Taxation Concerning Adjustments of Export Rebate Rates for Part of the Textile Products and Garments,
• Notice of the Ministry of Finance Concerning the Increase of Export Rebate Rates for Part of Export Commodities,
• Notice of the Ministry of Finance Concerning the Printing and Distribution of Measures for Management of Special Funds for SMEs Development,
• Notice of the Ministry of Finance and the State Administration of Taxation Concerning the Increase of Export Rebate Rates of VAT for Export Commodities, Such As, Labor-Intensive Products,
• Notice of the Ministry of Finance and National Development and Reform Commission Concerning the Implementation of Preferential Treatment in Fees and Charges for Relevant Staffs Engaging in Privately Owned Business,
• Notice of the Ministry of Finance, National Development and Reform Commission and the State Administration for Industry and Commerce Concerning Relevant Issues on Terminating the Collection of Administrative Charges from Privately Owned Business and Wet Market Management Fees,
• Notice of China Banking Regulatory Commission on Earnestly Implementing the Policy of “Encouragements and Discouragements” to Further Improve the Financial Services Provided to Small Enterprise,
• Notice of China Banking Regulatory Commission Concerning the Guiding Principles for Banks to Establish Special Business Outlets of Financial Services for Small Enterprises,
• Notice of the People's Bank of China, the Ministry of Finance and the Ministry of Human Resources and Social Security on Further Improving the Management of Small Guarantee Loans and Actively Boosting Employment Through Entrepreneurship,
• Notice of the State Administration for Industry and Commerce Concerning Issues on Pre-payment of Income Tax by Small Enterprise with Minor Profits,
• Notice of the Ministry of Finance and the Ministry of Industry and Information Technology Concerning the Proper Application for Approval of Subsidies for SMEs Credit Guarantee Business in 2008,
• Opinions of the State Council General Office on Currently Boosting Economic Development Through Finance.

4.3 Efficiency Evaluation of Implementing the SMEs Support Policy

4.3.1 Difficult to Shift external Demand to Internal Demand

The financial crisis provides an opportunity for the PRC's SMEs to upgrade and improve their productivity. SMEs in the PRC need to switch their long-run strategy from relying on external demand to internal demand. The export rebate policy does offer some benefits for export-oriented enterprises, but it is not strong enough as intermediaries, such as foreign trade companies, usually grab these benefits and use them to lower their prices. Some export-oriented SMEs are ready to divert themselves to domestic sales. However, it is rather difficult for enterprises to engage in domestic sales. For instance, most large government procurement orders are given to internationally renowned brands, and it is impossible for SMEs with independent property rights and similar product quality to garner such orders.

4.3.2 The Problem of Financing Difficult Remains Unsolved

Finance support policies for SMEs should reduce the risks and transaction costs associated with SME lending, increase the competition in financial markets, and strengthen the capacity for institutions to serve SMEs, thereby promoting sustainable lending to SMEs (Yuan 2008). The current loose monetary policy has failed to improve the financing situation for SMEs. Because SMEs have a weak resistance to risk, banks are more cautious about issuing loans to them. Although both the central bank and CBRC expressed their intent to strengthen the credit support for SMEs, banks remain reluctant to issue loans to SMEs if the government does not provide the final guarantee and bear the losses of banks (Li 2001). In addition, it is difficult to launch small loan companies, which both takes a long time and requires business development.

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