Trends and Growth of SMEs in China
Small and Medium Enterprises (SMEs) are the driving force behind the economic growth of China, making up about 97% of all enterprises in the country. They play a vital role in providing employment opportunities, keeping the market active through enticing fresh business while maintaining competitiveness against larger firms. We discuss in this guide what SMEs are in China, their roles in the market, and how they are supported and promoted in the country.
HOW ARE SMES DEFINED IN CHINA?
In China, the definition of an SME is quite complex and different to what other countries may classify it as. Compared to most countries that look at a company’s number of employees to qualify it as an SME, China uses the SME Promotion Law to categorize which businesses are SMEs. Under this law, the classification depends on the industry, assets, number of employees, and sales.
For example, a business in the retail sector needs to have fewer than a hundred employees and a revenue of less than RMB 10 million to be classified as a small company. When the retail company exceeds a hundred employees and starts earning more than RMB 10 million per year, it is considered a medium-sized enterprise.
For those in the construction industry, employees fewer than 600, assets less than RMB 40 million, and revenue not exceeding RMB 30 million are needed in order for the company to be considered small under the SME Promotion Law.
In countries that belong to the Organization for Economic Co-operation and Development (OECD), such as the United States and EU nations, SMEs are often classified according to the number of working employees. Usually, the upper limit for an SME is 200 employees, but this may vary across countries. In the US, SMEs are firms with fewer than 500 employees, while EU countries limit the number to 250 employees.
ROLE OF SMES IN CHINA
According to China’s Vice-Premier Liu He, SMEs are the country’s mainstay and a primary source of jobs. Since 2019, small businesses have been responsible for employing 80% of the non-government workforce.
In China, small firms with fewer than 300 employees make up most of the economy. These enterprises contribute to almost 75% of all job creation and 68% of exports. New business creation reached a record-high in 2018, with an average of 18,000 companies being created on a daily basis. The major leap in growth in SMEs is due to the government’s continuous improvements in the commercial registration system.
Aside from employment, SMEs are the key players in the technology sector. In the past few years, hundreds of thousands of technology SMEs have been registered, contributing to the continuous growth of the hi-tech manufacturing sector.
But local SMEs are not the only players to occupy the market. Foreign enterprises see the SME marketplace in China as an increasingly attractive prospect with vast growth opportunities available. Foreign investors are constantly looking for ways to enter the Chinese market and establish an SME. Concurrently, following the country’s “One Belt One Road” global economic strategy, large firms and local SMEs are seeking interactions and collaborations with foreign businesses to help them gain entry to the overseas market.
HOW SMES ARE SUPPORTED AND PROMOTED IN CHINA
SMEs are the backbone of the Chinese economy. As such, the government continues to show support through various tax cuts and offering financial support. Extensions for loan repayments and credit support are also given to qualified businesses.
During the COVID-19 outbreak in 2020, the government had made it easier for SMEs to apply for loans even when business owners were unable to provide guarantees. China further provided SMEs with a boost by waiving employer contributions to workers’ social and endowment insurance in order to ease their burden.
The monthly tax threshold for sales was raised from RMB 100,000 to RMB 150,000. This effectively reduced the tax burden on small-scale taxpayers, thus giving them more room for growth and expansion.
Some of the ways the government supports SMEs can be seen observed the following incentives:
Income tax policies
The income tax rate for SMEs was lowered from 33% to 18% for those with annual profits of less than RMB 30,000. For those greater than RMB 30,000 but less than RMB 100,000, a 27% tax rate is enforced, which is still lower than the previous standard rates.
SMEs whose business revolves around modern technologies are exempted from enterprise income tax for two years. A one year tax exemption can be applied for those in telecommunications, transportation, and IT services.
Qualified job agencies that provide work to unemployed workers may be eligible for tax exemptions for up to three years.
The Chinese government has also encouraged state-owned banks to create specialized departments to serve SMEs solely. Banks were also required to increase subsidiary branches in towns to extend their services to small businesses in rural areas.
In the past years, extra fees in loan processing have discouraged some SMEs from applying for financing. To entice SMEs back into applying for loans, the China Banking Regulatory Commission launched a mandate to eliminate unreasonable charges, standardize service fees, and control financial advisory fees.
Alternative sources of SME financing were also opened to give new entrants greater access to capital and loans. Equity financing, leasing and factoring, and shadow banking have become popular options for private funding. On the other hand, online lending and crowdfunding continue to be highly regulated, leading to a significant drop in clients.
The Ministry of Industry and Information Technology (MIIT) is proposing a five-year plan to help grow SMEs by levelling the playing field, enhancing innovation capacity, improving professionalism, and increasing financial availability. The country is expected to cultivate a million SMEs, with one-tenth of them specializing in innovations in high-end equipment manufacturing, new-generation information technology, biomedicine, green energy, and new materials.
THE GROWTH IN THE NUMBER OF SMES IN CHINA
During the 1990s, millions of workers left state-owned businesses to get re-employed in SMEs. The number of private-owned SMEs back then amounted to more than a million in total, but this figure rapidly grew over the next decade, outpacing the SME development in the US and Europe combined. By 2004, the number of SMEs in China rose to more than 40 million, as they slowly formed the backbone of China’s economy.
Contrary to China’s slowing economic growth, SMEs continue to prosper. The development in SMEs stems from recovering market expectations, increasing employment stability, lower operating cost due to tax levies, and improving investment sentiments.
5 TRENDS WE SEE WITH CHINA SMES
China is focusing on improving its manufacturing ecosystem and always looking for opportunities to make its supply chains more efficient. This is where SMEs in the fields of machinery, robotics, and logistics have a high chance of success. There is a high demand for automated manufacturing technologies as well as innovations in transportation and agriculture equipment.
The growing middle class in the country resulted in the increasing demand for European products, especially luxury items. Providing selling channels for European companies or other international businesses can be an e-commerce business option to consider.
Chinese investors are constantly seeking ways to invest in other countries and economies. It opens up opportunities for SMEs to offer services like financial management and specialist consulting services.
Cafes, bars, and F&B
Bars, pubs, and cafes are expected to continue their growth over the next few years despite experiencing a slump since 2020 during the pandemic. A continual increase of the middle-class population and a number of lifestyle changes have made these sectors “in-demand” amongst the local population, especially in the post pandemic world.
China’s implementation of energy-saving and emission reduction regulations has helped SMEs in the green energy sector grow (read more on ESG in China here) . Businesses in this sector are expected to improve and expand as the government continues to allocate generous subsidies to innovators involved in contract energy management (CEM) projects with them.
MSA in China
SMEs considering entering China or those currently in the market may not fully realize all the potential benefits they may receive. We specialize in working with SMEs in China and provide high-quality accounting, tax advisory and company setup services, amongst others. Our mission is to provide our clients with a sound understanding of the Chinese market, its administrative processes, and regulations. Contact us directly to learn more about our services and the knowledge you need to drive your business success in China.
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