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China’s SMEs facing cash flow problems

With China being essentially a first mover in all stages of the COVID-19 pandemic, studying the economic picture there can help provide possible indications of the coming economic challenges companies elsewhere around the world could face. Some new research released suggests that the challenges are not going to go away any time soon.

Ping An Insurance Group has announced the latest edition of the SME Financing Report Series, issued by Fudan-Ping An Research Institute for Macroeconomy (the Institute) under Ping An Digital Economic Research Center and the School of Economics, Fudan University. The headline finding of the research is that China's micro, small and medium-sized enterprises are facing cash flow problems and awaiting government aid amid the pandemic.

This SME Financing Report Series focuses on the problems facing micro, small and medium-sized enterprises (MSMEs) amid the COVID-19 pandemic, and makes mid- to long-term recommendations based on predictions of macroeconomic trends.

MSMEs are crucial to China, contributing 60% of GDP and providing 80% of urban employment. Due to the pandemic, Chinese MSMEs are facing cash flow problems. Despite the introduction of a series of financial support policies, small and medium-sized banks are facing the dual challenges of rising ratios of non-performing loans and narrowing net interest margins when they extend credit to small and micro enterprises. However, the research suggests that the current predicament provides an opportunity for using big data, artificial intelligence (AI) and other technologies to solve the financing problems facing MSMEs.

China's GDP growth rate will hit a 40-year low 

Under the coronavirus pandemic, more than 100 nations around the world have taken quarantine, social distancing, and lockdown measures, which have a huge impact on the global economy. Considering the pre-pandemic economic growth slowdown and the impact of COVID-19, China's GDP is expected to grow at a rate of -1.5% to 3% for 2020, a 40-year low. In the long run, with the pandemic and deglobalisation, global trade may give way to intraregional trade, multilateral trade to bilateral trade, and international trade to domestic trade. China's current and future macroeconomic performance will be dragged down mainly by global supply chain shocks and shrinking external demand.

The pandemic has dealt a heavy blow to MSMEs

The first-quarter revenue of MSMEs was less than 50% of the same period last year. The report estimates that the revenue of MSMEs in the first quarter decreased by about RMB6.7 trillion (about 6.76% of the annual GDP of 2019). Turnover of MSMEs in the education industry was only 10.2% in February and 11.8% in March of the same periods in 2019. For MSMEs in the accommodation and catering industries, the turnover was only 12.8% in February and 23.5% in March of the same periods last year. Turnover of MSMEs in the cultural, sports and entertainment industry in February and March this year was less than 30% of the same period last year. For manufacturing MSMEs, turnover in February and March was less than 40% of the same period last year.

Smaller banks face challenges extending credit 

More than 70% of small and micro enterprises get their loans from small and medium-sized banks. Whether the central government's financial support policies can be fully implemented depends on the lending capacity of small and medium-sized banks. At present, rising non-performing loan ratios and narrowing net interest margins have restricted small and medium-sized banks from extending credit to small and micro enterprises.

China's policy priority shifted when responding to COVID-19

The Institute adopted natural language processing (NLP) to run a semantic analysis of more than 100 speeches delivered by the Chinese leadership and government work arrangements. It finds the work of the Chinese government can be split into three stages:

  1. Ensuring supply of medical devices and necessities are not disrupted when battling with the disease (before 19 February). 
  2. Lifting lockdown measures by risk levels (from 19 February to 17 March). 
  3. Coping with the global recession (after 18 March). 

A series of policies have been announced to help MSMEs cope with the shock of COVID-19, namely: financial support, tax and fee cuts, encouraging employment, and helping boost productivity. More than RMB6.03 trillion has been earmarked for financial support and tax and fee cut policies.

National and provincial fiscal revenues facing severe pressure

Fiscal revenue has declined at both national and provincial levels. A growing gap between fiscal revenue and expenditure will be inevitable in 2020. As a result, space for fiscal policies such as tax reduction and fee reduction is relatively limited. In response, it is necessary for monetary policies to provide necessary liquidity for MSMEs. Fiscal policy needs to be more focused on improving quality and efficiency, by cutting unnecessary expenditures and promoting budget performance management. On the other hand, it is also imperative to alleviate grassroots fiscal difficulties through debt issuance, for which the report suggests a lift of the deficit rate to 4%, the issuance of RMB2 trillion of special Treasury debt and an increase in the issuance limit of special bonds to RMB4 trillion this year.

Using technologies to solve financing problems

According to the report, commercial banks still have plenty of room to lend money to small and micro enterprises using central bank's low-cost funds, and more than 70% of loans for MSMEs come from small and medium banks. Helping small and medium-sized banks to manage the loan credit risk of MSMEs is the key to solve the financing problem of MSMEs. The report suggests banks utilise technologies including big data and AI to effectively regulate the use of loan funds. The report urges local governments to grasp the benefits of digitalisation, reducing unnecessary expenditure, improving budget management, and enhancing the efficacy of fiscal policies. 

Clearly there are lessons that both corporates and banks in other countries can take from the Chinese experience, particularly when it comes to deploying technology to free up credit and liquidity.

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