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China SMES laws and policies research


May. 2010, Volume 7, No.5 (Serial No.55)

Journal of US-China Public Administration, ISSN 1548-6591, USA

SME law and policy analysis
ZHOU Jun, GUO Tu-xin, LU Shan
(School of Economics, Wuhan University of Technology, Wuhan 430070, China)

Abstract: Since the reform and opening-up, especially in the new century, China’s SMEs are rapidly springing up; they have become an important force of pushing China’s national economic and social development. The rapid development of SMEs is playing an increasingly important role in stimulating the economy, increasing the state tax revenue, promoting the employment, pushing technological innovation and improving the people’s lives. It is full of meaning for Chinese Government to provide a sound law and policy environment for SMEs, including mediating and regulating the behavior of domestic SMEs, promoting and protecting the prosperity of SMEs, if we want to pursue the economic prosperity. This article will analyze the status of the development of China’s SMEs, and research on the related policies and laws. Key words: SMEs; finance; tax law; policy

1. Introduction
Since the reform and opening-up, China’s individual, private and other non-public ownership economy has continuously grown and has become an important component of socialist market economy as well as an important force promoting the development of social productivity. SMEs, on behalf of individual, private and other non-public ownership economy, are of great strategic significance in the prosperity of urban and rural economy, increasing revenue, expanding employment opportunities, improving people’s lives, optimizing the economic structure, promoting economic development, building a well-off society and accelerating the socialist modernization process. According to the State Ministry of Industry and Information Technology Statistics, by the end of September last year, the national industrial and commercial registration of enterprises reached 10.3 million, excluding 31.3 million individual industrial and commercial households. According to the current criteria for the classification of SMEs, it is estimated that SMEs have reached 10.231 million, more than 99% of the whole number of enterprises. The final goods and services worth that China’s SMEs created equivalent 60% of the gross domestic product, and its tax amounted to about 50% of the total tax revenue, providing nearly 80% of urban jobs.1

2. The definition of SMEs
SMEs are always defined by either quality or quantity in different countries. The indicators of quality include corporate organization form, financing methods and the status of the industries and so on. Quantitative indicators
ZHOU Jun, Ph.D., professor supervisor, School of Economics, Wuhan University of Technology; research fields: development economics and industrial economics. GUO Tu-xin, Ph.D. candidate, School of Economics, Wuhan University of Technology; research field: economics of firm. LU Shan, Ph.D. candidate, School of Economics, Wuhan University of Technology; research fields: corporate governance of East Asia. 1 Taken from Li Report on the Eleventh Standing Committee 12th Meeting of the Second Plenary Session, Minister of Industry and Information Technology. 79

SME law and policy analysis

are mainly focus on the number of employees, the capital, a period of time turnover and so on. China is to eclecticism, which from both the qualitative and quantitative aspects to definite SMEs. The “SMEs Promotion Law of The People’s Republic of China”, which is adopted by The Ninth National People’s Congress Standing Committee 28th Meeting in June 29, 2002 Article II provides that SMEs means the enterprises legally established in the PRC of small and medium scale of production and operation which is help for meeting the social needs, increasing employment, and in line with the national industrial policy. The “Interim Provisions on the Issuance of the Notice Standard for SMEs” (Guo Jing Mao [2003] 143 SMEs) issued the following year made a clearly definition of SMEs in industrial, construction, wholesale and retail trade, transportation, postal industry, residential and catering industry, which according to the number of employees, sales and total assets. China’s SMEs include state-owned SMEs, urban concentration SMEs, township enterprises, private and individual enterprises and so on. Most of the SMEs are non-state-owned. Regulations like “Non-public Economy 36” and the “Suggestion on Further Promoting the Development of SMEs” relax the trade restrictions for non-state-owned enterprises. It made the non-public assets break through the fields of monopolies, social and public utilities, infrastructure, financial services, science and technology of national defense which introduce the market competition mechanism. Since then, SMEs involved in areas are expanding from mining, general manufacturing, construction, transportation, traditional trade and services industries to infrastructure, public utilities, high-tech and emerging industries, modern service industries and so on. SMEs are also changed from scattered operations to concentrated operations, from the early developing in the domestic market mainly to both of the domestic and international markets.

3. The SMEs’ dilemma
With the market-oriented economic developing, SMEs are more vulnerable in the fierce competition with large enterprises though with a large number. Suffered with many negative factors, such as the rising costs of raw materials, the implementation of the new “Labor Contract Law”, RMB appreciation and a tight monetary policy, way to the development of SMEs is full of thorns. According to official statistics, in the first half of 2008, a total of 67,000 SMEs closed down. After the outbreak of the international financial crisis, a serious impact on SMEs’ making losses, cut-off and semi-cut-off businesses increase, which lead to economic efficiency dropped significantly. The major problems of SMEs include the following aspects. 3.1 Financial problems Funding is an essential factor for business survival and development, but difficulty in financing is a congenital problem for the development of SMEs. Financing methods include direct financing (bonds, IPO) and indirect financing (mainly refers to bank loans). In either case, SMEs are exposing to a lot of difficulty. In the direct financing, the stock market is high thresholds, which is difficult for SMEs to raise funds through the capital in the open market. Business system is not a sound investment, which makes the entry and the exit of venture investment hard by the policy. So it is difficult for SMEs to obtain financing through private equity. Bank loans is the most important indirect means of financing business, SMEs have inherent disadvantages. First of all, a high debt ratio makes SMEs less dispose of their own assets. Second, corporate-owned assets often do not meet the banks preference of liquidity and the ability of preserve and increase, as the mortgage rate is low. As the harsh credit rating of the credit management, the management costs of bank loans to SMEs are relatively high, this affected the bank’s loan initiative. So, banks are reluctant to carry out SME credit business. Financing

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SME law and policy analysis

difficulties have become a serious bottleneck restricting the development of SMEs. 3.2 Tax burden Tax burden accounts for a 20% proportion of business costs, especially in the international economic crisis, trade protectionism is rampant, and countries have to raise import duties, which added most of our export-oriented SMEs to the misfortunes. The universal tax incentives include raising the starting point of tax, offsetting and exempting investment, increasing depreciation of fixed assets and so on. At present, China’s tax incentives for SMEs are relatively simple; mainly include two kinds of incentives like lowering tax rates and tax relief, less of providing special tax incentives for SMEs in founding, development, and technology development.

4. Improving the legal system and policy framework to protect SMEs
In February 2005, the State Council promulgated the “Several Opinions of the State Council on Encouraging, Supporting and Guiding the Development of Individual and Private Economy and Other Non-Public Sectors of the Economy” (“non-public economy 36” in short), which is the first central government document serving the development of non-public sectors of the economy especially SMEs since the founding of new China. It indicates the strong determination of the central government to increase taxation and financial support for the non-public ownership economy. Afterwards the State Council have issued a series of supporting policies such as “Detailed Rules for the Implementation of the Interim Regulation of the People’s Republic of China on Value Added Tax”, “Notice of Supporting and Guiding the SMEs Credit Guarantee Institutions to Offer More Help to Alleviate the Difficulties in Production and Operation of SMEs” and “Several Opinions of further promoting the development of SMEs”. The regulatory policies above play a positive role in reducing the SMEs’ tax burden, stimulating their innovation and widening their financing channels, but much still remains to complete. So it is necessary to raise those policies to the level of law to give a long-term and stable legal protection to the SMEs. 4.1 Further improve the legal system Firstly, we need to promulgate “SME Basic Law” as soon as possible. In the basis of “SME Promotion Law”, promulgating the “SME Basic Law” to determine the SME’s status, pattern, rights and obligations, organization and behavior in law. It would be not only consistent with international practice, but also conducive to the development of SMEs in China. Secondly, we need to improve the supporting legislation for SMEs. The supporting legislation for SMEs would include both fair competition and supporting. The related legislation in China is weak; we should accelerate the pace of legislation such as “Competition Law”, “Antitrust Law” and SME financing and technological innovation legislation, and enhance its operational, so as to create a favorable legal environment for SMEs competition as much as possible. 4.2 Further improve the policy framework 4.2.1 Financial policy systems Firstly, deepen the financial reform. We should establish more SMEs-serving financial institutions and improves the efficiency of state-owned bank’s SMEs loans. It’s also important to format small and medium commercial banks which focus on local services. Thanks to scattering in various regions and closing to the SMEs, regional financial institutions can provide convenient and flexible financing services to the SMEs and have a good effect in the United States, Japan and many other countries. To strongly support the private banks. According to incomplete statistics, the billboard for the proportion of loans to SMEs goes as private banks, urban and rural

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SME law and policy analysis

credit cooperatives, city commercial banks, state-owned bank. So giving taxation and financial support to the private banks can make a superposition effect. Secondly, establish a diversed credit guarantee system. On the one hand, we should build a four ranked credit guarantee system which including central, provincial, municipal and county credit guarantee agency. There should be a special loan guarantee fund department in central and local governments. By which the SMEs can get a loan guarantee. Ministry of Finance need to appreciate special funds to those policy credit guarantee agencies. On the other hand, in the developed areas we can start the “SME Re-guarantee Fund” pilot, for the purpose of providing re-guarantee loans to SMEs. The introduction of internationally accepted SMEs credit assessment system is also very meaningful. We should give a comprehensive consideration of such factors as credit history, technological innovation ability, market share, management, so as to enhance the overall quality of SMEs. Thirdly, improve and perfect the multi-level capital market system and the SME stock market. Give more attention to the growth enterprise market and short-term financing bills, with which to broaden the financing channels for SMEs. 4.2.2 Tax policy system Firstly, lower taxes. Lay down laws to reduce tax rates for SMEs. From the value-added tax, business tax to the enterprise income tax we should start an all-round reduction in tax rates for SMEs. We now imply reduced EIT rate of 20% and 15% to eligible small low-profit enterprises and high-tech enterprises. In the next stage we should reduce the tax burden wider and clarify all the tax-cut policies through legislation. Secondly, relaxation of tax cuts. Imply special tax-cut policies to the SMEs which are in the babyhood or export-oriented. The ideas such as tax exemption, fixed-quantity reduction, and fixed-rate reduction should be adopted. Thirdly, raise the tax threshold. Raise the taxation threshold of value-added tax, business tax, EIT, reducing the tax pressure on SMEs. The last but not the least, we should increase the depreciation rate of fixed assets. This will not only make SMEs’ willingly to accelerate their industrial upgrading but also can reduce the VAT burden.

5. Conclusion
In short, the development of SME should be regulated and standardized by national laws and policies, especially after the formation of the market legal system in China. With the building of a socialist market economy with Chinese characteristics, the China-style SME development support system will develop to the trend of translating policies into law.
References: Andre Van Stel, Martin Carree & Roy Thurik. (2004). The effect of entrepreneurship on national economic growth: An analysis using the GEM database. Discussion Papers on Entrepreneurship, Growth and Public Policy, (4). Dieter Ernst. (1995). Carriers of regionalization: The East Asian production networks of Japanese electronics firms. The Berkeley Roundtable on the International Economy. Knowledge for development. World Development Report 1998 (Annotated Outline). Richard H. Steinberg. (1995). Trade-environment negotiations in EU, NAFTA and GATT/WTO: State power, interest and the structure of regime solutions. The Berkeley Roundtable on the International Economy.

(Edited by Sherry and Emma)

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