By Fu Jing (China Daily)
Updated: 2007-12-10 10:22

China's capital market is still maturing and banks favor big borrowers - those are the oft-repeated explanations why China's small and medium-sized enterprises (SMEs) suffer from a lack of capital.

But Li Zibing, president of China Association of Small and Medium Enterprises, also blames millions of companies under his umbrella for their own long-lasting headache.

"Some of them lack credibility," Li tells China Business Weekly in an exclusive interview.

Holding the view that every party is responsible, Li doesn't think the SME migraine can be cured overnight.

"It will take years," he says.

China's SMEs now have very narrow access to capital markets. Statistics show 90 percent of their capital is raised from banks, while in industrialized countries, SMEs acquire 70 percent of funds from capital markets and 30 percent from banks.

Li said the SMEs, especially those in the private sector, are facing fierce market competition. Their profits are much lower than State-owned enterprises (SOEs) holding monopoly positions, so banks favor large SOEs, instead of SMEs.

"You can see from the figures the disparities and the direction of laws and policy-making," says Li.

SMEs have urgent need for direct financing through the issuance of corporate bonds. Growing numbers of enterprises are approaching Li's association to consult on plans for issuing bonds.

"If we further expand the corporate bond market, growing enterprises will be acquiring their capital through direct funding," says Li.

China's SMEs now mainly rely on retained earnings and underground private financing to expand their businesses. In an effort to open more financing channels, the government has pursued various options, including international collaboration and regulatory support, to help maximize their business potential.

In January 2003, a law on the promotion of SMEs took effect, followed by a State Council directive to "encourage, support and guide the development of SMEs" that was released in February, 2005. Known as the 36 Regulations, the Council's directives cover seven aspects, including market access, financing and services.

Despite the current bind, there are some promising signs, Li says.

Calling it a groundbreaking event, Li notes the effort by Shenzhen Mayor Xu Zongheng and 20 SMEs in Shenzhen, of South China's Guangdong Province, including mainland-listed Invengo Information Technology Co and Sanxin Glass Technology Co, which jointly issued bonds this year to raise 1 billion yuan from institutional investors.

Yet since SMEs first were allowed to issue corporate bonds in 2006, aggregate funds raised have reached only about 1.8 billion yuan. "It's just of symbolic meaning, compared with the SMEs fund shortages of multi-trillions in yuan," says Li.

China has also helped improve the credit standing of SMEs by strengthening registration, rating, and data collection and distribution, Li says.

By the end of last year, credit guarantee institutions serving SMEs across the country had raised 123.2 billion yuan ($16.65 billion) in guaranteed capital.

Crucial role

SMEs have played a vital role in China's economic and social development.

The latest figures show that there are now more than 40 million SMEs in China, making up 99.6 percent of all companies in the country,

They have contributed 60 percent of the national gross domestic product (GDP), about half of the country's total tax revenues and provide more than three-quarters of urban employment opportunities. Sizable industrial SMEs recorded 28 percent annual growth in asset value during the past five years, higher than the country's average GDP growth of 9.5 percent in the period.

More than 80 percent of workers laid off from State-owned enterprises found employment in SMEs, which also constitute a key source of jobs for college graduates. SMEs file 65 percent of the country's patent applications and develop more than 80 percent of its new products.

Of China's $1.4 trillion in foreign trade last year, 70 percent came from SMEs.

SMEs export the bulk of China's clothes, textile products, toys and leather shoes, and are increasingly involved in hi-tech industries such as telecom equipment, electronics and biotechnology products.

"They are the most dynamic economic engines of China and we cannot afford to not pay attention to them," says Li.