Abstract: To provide the much needed support for SMEs in China, it’s crucial to cut taxes and fees as well as reduce costs, but generating business orders and keeping the firms in operation is more important. Tax or fee reductions won't help a firm that isn't producing. The government should provide targeted assistance to those firms, whether through bailout funds and subsidies, or orders from large corporations, projects, and the government.
China's Government Work Report for 2022 places an even greater focus on maintaining economic and employment stability. A healthy economy and society are dependent on secure employment, yet China faces several challenges:
To begin with, there has been a departure of employment goals from the conventional economic growth goal. Simply attaining the GDP growth target does not guarantee the achievement of employment rate target, mostly because the employment elasticity of GDP is dropping. Growth is mostly manifested in technological advancement, industrial upgrading, and the substitution of technology for labor, leaving employment to rise at a slower pace. As a result, the pressure on employment comes from the misalignment of economic and employment recovery.
Then, employment maybe an enduring issue, but now flexible employment has been included in the calculation of the employment rate. Driven by new industries and technologies, the flexible employment situation changed dramatically during the pandemic, leading to more complex and severe employment challenges. The question we must address is how to appropriately interpret the employment issue and the corresponding policies when the statistical method has changed.
SMEs, which account for more than 70% of global employment, constitute the backbone of "stable employment." China's 140 million SMEs provided more than 85% of all jobs, whereas state-owned firms (SOEs) employed only 55.62 million people at the end of 2020, accounting for 7.5%. It is clear that small and private businesses are the main contributors to employment. However, owing to China’s system, its policies and packages for "stabilizing growth" often trickle down from big corporations and SOEs to small businesses.
The recovery in GDP and employment is therefore asynchronous, as reflected in several indicators. The PMI index, for example, has been above the breakeven line of 50 for several months in a row and has rebounded for two consecutive months, but the PMI index for small businesses continues to slip below 50. There is also a significant disparity between large and small enterprises, placing employment under strain. The "trickle-down effect", and thee phenomenon that "a large river rises when small rivers are full" have not been evident in recent months. This raises several questions:
First, is the employment situation improving or does it require additional support? When the development indicator for large and small enterprises, particularly the SMEDI (Small and Medium Enterprises Development Index), falls, it indicates that the employment situation isn’t stabilizing like other indicators, but is still under pressure. Although the incremental impact of this constant shock is reducing for micro and small businesses, the cumulative effect is too much for them to endure. As a result, in the acceleration of bailout and stimulation, micro and small businesses have reached their maximum capacity for absorbing labor, forcing them to deal with the current crisis through layoffs, business closures, and other measures. If "stable employment" is obtained solely by stabilizing growth, stabilizing large firms, and launching large projects, it may cause a "J-curve effect". In other words, the employment situation won’t improve, but rather deteriorates as the bailout process progresses.
Second, how does China go about rescuing small businesses? One of the main goals stated in China's Government Work Report for 2022 is to stabilize the development of SMEs. In other words, the government is focusing unprecedented attention on providing relief for SMEs. Based on many sample surveys, the National SME Institute of Renmin University of China identified four major challenges facing SMEs: 1) a lack of orders, 2) rising labor and raw material costs, 3) a lack of funds for daily operations, and 4) a lack of funds for development.
To provide much needed support for small firms, it’s important to cut taxes and fees as well as reduce costs, but generating orders and keeping them in operation is more important. Tax or fee reductions won't help a firm that isn't producing. The government should provide targeted assistance to those firms, whether through bailout funds and subsidies, or orders from large corporations, projects, and the government.
It is often the last straw that breaks the camel's back, not the initial massive weight. We should recognize and avoid the "last straw". The government should step up instead of reducing SME support simply because external shocks has slowed. This is why the emphasis of the Government Work Report on employment is very much warranted. I expect that new pathways will be adopted to address the key issues of employment with more precise policies, so as to achieve better results in employment stabilization.
The original article was first published in Beijing Daily on March 21, 2022. It was edited and translated by CF40 and has not been reviewed by the author. The views expressed herein are the author’s own and do not represent those of CF40 or other organizations.
