Excess capacity, taxes stall recovery of SMEs

The profit rebound of China's small and medium-sized enterprises is lagging because of excess production capacity and reduced competitiveness under current tax burdens.

And SMEs may see further contraction in the near term, according to the China Association of Small and Medium-sized Enterprises.

Its Small and Medium-sized Enterprises Development Index, an indicator that shows the SMEs' operational situation in eight industries, hit 87.5 in the third quarter, its lowest level since July 2010, showing that the downward trend of small-scale businesses has not yet been reversed, the association said on Monday.

The index has dropped for eight straight quarters, according to the association. The reading was 90.3 in the second quarter and 92.6 in the first three months.

Based on a survey covering about 2,500 SMEs every quarter, readings range from zero to 200. The index shows an improved business climate when it is more than 100, and a worsening climate when the reading is less.

Among the eight sectors in the survey, industrial business declined the most, to 86.6, during the July-to-September period, compared with 92 in the second quarter, the association added.

However, some industries' sub-indices have suggested a rebound, including the construction, transportation, hotel and catering-service industries.

The relatively low level of the index may continue to remain even if the macroeconomic situation bottomed out at the end of the third quarter, according to the association.

"There will be a lag in the SMEs' business recovery because of the excess production capacity, financing difficulties and other problems," the association said.

"The current level of taxes for SMEs is too high, which has restrained the companies' vitality and affected their profits," said Jing Ulrich, managing director of global markets in China at the JPMorgan Chase & Co.

She preferred to take structural tax cuts than a large expansion of fiscal spending for spurring the economic growth.

Despite the weak SME business, China's economy has shown positive signs since September.

The year-on-year growth of industrial output rose to 9.2 percent in September from August's 8.9 percent, while the profit increase of industrial business jumped to 7.8 percent from a decrease of 6.2 percent in August, data from the National Bureau of Statistics showed.

The China Electricity Council has predicted that in the last three months of this year, the country's total electricity consumption may surge by 6 percent from a year earlier, compared with a growth rate of 4.8 percent in the first three quarters, supported by the economic rebound.

Electricity consumption is considered a strong indicator of industrial production, which consumes about 75 percent of the nation's total electricity.

The national electricity council said a 5 percent whole-year increase may be seen by the end of December.

Liu Yuhui, chief economist with Huatai Securities Co Ltd, said that industrial output was expected to see a boost after October, and the producer price index may bottom out.

"Industrial companies are likely to gain more profit in the next two quarters, along with a rebound of the whole economy," Liu said.

The HSBC flash PMI, the preliminary indicator of manufacturing activity, rose to 49.1 in October from 47.9 in September.

"Leading indexes all point to rising growth momentum. We expect the official PMI to rise to 50.2 in October from 49.8 in September," said Zhang Zhiwei, chief Chinese economist at Nomura Securities Co Ltd.