China Needs to Support Main Street

The Economist reported that in 2001, the Gini coefficient (a measurement of wealth distribution whereby 0 equals complete equality and 1 indicates complete inequality) for China was 0.33. This inequality has since grown to approximately 0.47, as wealth continues to consolidate unevenly. 

Granted, in a rapidly evolving country of 1.3 billion people – of which millions are rural farmers – this number is going to be somewhat lopsided. However, it doesn’t take away from the fact that the wealthy are reaping the rewards of China’s growing economy, often on the shoulders of state-owned enterprises (SOEs), while private and small business owners struggle. While much attention has focused on the successes of China’s growing class of millionaires, the troubles and trials of small business owners and local entrepreneurs are often overlooked. If China wants to continue bolstering its economy, it will be essential for the government to stay mindful of the difficulties that many private small and medium enterprises (SMEs) face.

In China’s “socialist market economy,” the government sanctioned private companies in 1988. However, up against SOEs, private SMEs have faced insurmountable competition as they don’t enjoy the foundation or the connections state enterprises benefit from. One problem is that SMEs' costs are higher relative to those of SOEs. This is in part because SMEs do not receive equal subsidies. In addition, they bear extra costs. For example, SMEs often have to hire companies that exist solely to navigate complex bureaucracies and facilitate “relationships,” in order to obtain government approvals that are necessary to conduct business.

To argue for complete government disengagement would obviously be too drastic a suggestion and actually unnecessary. Therefore, it is important to see how the government can encourage SMEs to thrive. 

Indirectly, the government can help by reducing subsidies SOEs receive. International agencies have been critical of China in their subjective funding policies to SOEs as they are given an unfair advantage in the world market by driving their prices down. SOEs received $2.3 billion in subsidies in 2005 alone, enabling them to increase and expand their businesses at an unfair rate, leaving their domestic competitors, namely private SMEs, behind. Were this subsidy favoritism reduced, SMEs would be given an opportunity to usurp some of the SOEs’ business.

Directly, SMEs need help in their ability to expand their businesses. This can be done through effective marketing. Especially as the renminbi continues to appreciate and buyers turn to more inexpensive markets, SMEs need help expanding their customer base. There are few useful outlets for SMEs to market themselves, which leads these options to be exceedingly expensive. Some government rebates have been implemented to assist SMEs with these costs. A friend of mine who manages a small private textile company said the government is reimbursing small firms a portion of annual fees associated with creating a page on a leading business-to-business website. This is a step in the right direction; however, similar efforts need to be expanded to show a full commitment to private enterprises.

Another more constructive method is to make it easier for SMEs to secure loans. Small business owners and entrepreneurs often find it difficult to get financing, as state run banks prefer the safe bet in awarding loans to SOEs. A more recent Economist figure claims, “Loans to small and medium-sized enterprises comprise 4% or less of the total made by three of the country’s four largest banks.” With such an uneven ratio, entrepreneurs are prevented from starting or expanding their businesses effectively. Even when SMEs do receive loans, they can be charged cripplingly high interest rates. The government can help ease this burden on SMEs and allow them better access to capital by ridding the system of preferential loans to SOEs.

Undoubtedly, with or without government support, SMEs will continue to face pressure over the next few years. The state run newspaper, China Daily, conducted a survey verifying this bleak outlook. This means that it is vital that small businesses are given every opportunity to not only succeed but also flourish. If the Chinese government hopes to encourage job growth and a better quality of life for its citizens, this is their ticket. As quality jobs increase, so will the spread of wealth, and it will ideally push China in the direction of a consumer-driven economy Chinese leaders hope to promote.

Photo Credit: cogdogblog