Small businesses to brighten China's economic prospects

As China's economy runs out of steam, small businesses could bring back vitality to the pursuit of growth.

The People's Bank of China, the country's central bank, announced this month a 0.5 percentage point cut in the reserve requirement ratio for banks lending to small firms, desperate for capital. Companies of this type account for over 70 percent of market entities.

The cut could provide 350 billion yuan (57 billion U.S. dollars) in loanable funds and have a significant effect on the real economy if used properly, Xiang Songzuo, chief economist at the Agricultural Bank of China, estimated.

Small firms already enjoy tax breaks, reduced admin fees and relaxed market access. The effects of those policies can be seen in a software park in south China's Hainan Province, which, with local government support on finance, land and administrative approval, has attracted over 300 companies, mostly small startups. A 30 percent tax refund is available for companies paying less than 300,000 yuan in annual taxes for three years after they enter the park.

Wan Peng of Hainan Jiuchun Science and Education Media Co., speaks highly of such measures. Thanks to the aid, Wang's company has come out of the hard times, has over 100 employees at present, and is expanding into four provinces in southern China.

"Small" in Chinese busines terms means entities with total assets worth no more than 30 million yuan for industrial players and 10 million yuan for those in other sectors. The number of employees should not exceed 100 and tax due should be less than 300,000 yuan. There are around 11.7 million such firms, almost 77 percent of total companies.

If one-man operations are taken into acount, the number quintuples and the ratio tops 94 percent, according to the State Administration for Industry and Commerce.

Despite limited revenue and volatile profits, those firms contributed 60 percent of GDP and paid half of the nation's tax bill. Over 70 percent of new jobs are provided by them.

Tang Jianwei, senior analyst with the Bank of Communications, considers government support appropriate and necessary in current circumstances.

Echoing his words, Bai Jingming, vice director of the Research Institute for Fiscal Science under the Ministry of Finance, said the recent measures will help companies become more confident, create jobs and stabilize growth.

As the foundation of China's real economy, these enterprises play irreplaceable role in economic advance, technological innovation and social stability, said Miao Wei, China's Minister of Industry and Information Technology.

Small firms in China still face a bumpy ride. Financing costs and taxes can not be eliminated once and for all and labor costs keep rising.

Tang wants the central government to be more bold in cutting taxes and in financial support to truly help the small firms that have borne the brunt of the economic downturn. A bank focused on loans to small firms should be established to provide liquidity for small but important market players, he said.