China Reaching Out to Small and Medium Businesses

Robert Hsu, September 25, 2009

In my free e-letter, Asia Insider, I recently discussed how the Chinese government took the right action after the collapse of Lehman Brothers last September. Part of the Chinese government's steps to overcoming the impending global financial and economic crisis was implementing a massive $586 billion stimulus package.

This stimulus package was vital to China's ability to overcoming the global crisis, and it helped the country continue to post robust economic growth despite the global slowdown. The Chinese government was able to accomplish this because it was constantly using funds from the stimulus package to flood the economy with liquidity. And, as you probably know, this positively impacted many Chinese companies.

China's state-owned enterprises, or SOEs, benefited from influx of liquidity more than smaller, private Chinese businesses. That's because SOEs have the full weight of the Chinese government behind them, and policymakers refused to let these businesses fail during the global crisis. As a result, we made some nice profits by investing in several well-run Chinese SOEs.

But now, the picture is starting to change once again. Finally, those small and medium enterprises are being noticed by the government in China. Yesterday, China's state council announced a plan to offer greater support for the country's small and medium enterprises (SMEs) to help boost them out of the financial crisis. Some of the ways include cutting taxes, encouraging private capital to offer financial services and upping training in management and corporate governance.

This is great news not only for these small- and medium-sized businesses, but also for the Chinese economy as a whole. As I've mentioned to my China Strategy readers, small businesses create the majority of jobs in China. However, over the past year, many often had difficulty finding financing or loans.

Now, in order to help the nation's smaller businesses, China is cutting corporate income tax for eligible small and medium businesses. Additionally, to expand the financing channels available to these businesses, China plans to encourage private loan companies to participate in rural cooperative reform and to buy into rural commercial banks.

The new measures are intended to create incentive for private companies to create certain types of loan companies long before they would be qualified to enter the bigger and more profitable banking industry.

And on the training side, China has plans to train a whopping one million managers in smaller companies over the next three years as a way to increase the stability and governance of small and medium businesses. Also, China is nearly doubling the amount earmarked to help these businesses innovate in technology and increase market share.

I'm excited about this plan, and the effects it will have on China's economy. A focus on small- to medium-sized businesses will create more jobs throughout the country, and ultimately continue to benefit the Chinese economy. This is just another example that China's economic recovery is spreading, which is creating profitable investment opportunities for China investors.

To learn how to take advantage of this and other trends in China, join China Strategy today!