China banks on SMEs for growth

The Communist Party's reform manifesto aims to level the playing field for privately-owned small and medium enterprises.

All those western market analysts who are worried and reacting negatively to the ‘slowdown’ in China perhaps need a lesson in reading Chinese economic tea leaves. The tea leaf reading also needs to include an understanding that China is reformatting its economy with the intent of shifting from dominance on state-owned business to reliance on small and medium enterprises.

I had such a lesson in Macau last week attending the International Small Business Pan-Asia Congress.

Speakers from Hong Kong, Macau, Taiwan, Korea, Japan, Indonesia and Malaysia discussed how their region, under the shadow of the colossus of China, is surging economically, dominating global growth now and set to do so throughout this Century.  

Li Zhi Bin, chairman of the China Association of Small and Medium Enterprises, brought to the forefront the scale of this economic surge, describing in some detail the significance of the Chinese Communist Party’s recent Congress and the Plenary Session held last month.

He described the series of announcements and papers from these peak CCP events as being the most significant in 35 years, since that of the opening up of China by Deng Xiaoping.

The aim of the CCP is for China to be a fully-fledged market economy by 2050, being "wealthy, democratic and socialist." While ‘wealthy and socialist’ may be easy concepts for China to grasp, we don’t yet know what the idea of ‘democratic’ means within the framework of CCP thinking.

The CCP has accepted that the dominance of the government sector and government commercial enterprises is interfering in its goal of a market economy and that it is suppressing innovation. One of the six pillars of this CCP reform program is to rebalance government with the market in China, Zhi Bin said. This means small and medium enterprises (SMEs) will be put at the centre of economic activity.

SMEs make up more than 90 per cent of private companies in China, Zhi Bin said. These 35 million registered businesses contribute 60 per cent of GDP, 50 per cent of tax revenue, hold 65 per cent of patents and produce 80 per cent of all new products. And they are recognised as the most significant of social stablisers because they employ 80 per cent of the workforce.

A little while ago an associate of mine, who has more than 30 years of doing continuous business in China, made an important observation: he said that the CCP knows its hold on power is dependent on delivering continuous economic growth and prosperity in China.

If that’s so, the new CCP economic reform program can be understood within a CCP self-interested political motivation. Big business, particularly government owned and controlled business, concentrates wealth. Small business is both the major driver of economic growth and broad wealth distribution in any society. Conceptually, the CCP must both enable economic growth and ensure wealth is spread throughout the Chinese population. Enabling small business is becoming critical to the CCP.

This message seemed to come through (by implication) in Zhi Bin’s comments. SMEs are key to the rebalancing of the private sector with state-owned enterprises, he said. Reforms are to proceed in areas of legal treatment, access to resources, particularly finance, approvals processes and much more.

Specifically these reforms include the creation of SME-syndicated loans and bond arrangements, a third party credit rating system, an SME development index and the central government working with local governments to ease regulation burdens.

These specifics reveal that even with the massive growth of China over the last few decades, its transformation from a closed communist state to a functioning market economy continues as a significant journey. China still doesn’t have many of the institutional supports for business that are normal in market economies.

Some China observers treat such ‘blue sky’ statements with caution, claiming the CCP has a history of overstating and under-delivering. Still, close attention should be paid; Xiaoping’s statements of reform 35 years ago were probably treated with skepticism. Certainly over time the CCP has delivered for China what was promised.

Ken Phillips is executive director of Independent Contractors Australia and author of Independence and the Death of Employment.