Mr Liu

Financing Difficulty for Small and Medium-sized Enterprise in China (Evidence from Manufacturing Sector in Jiangsu Province)

Abstract: It is well known that SMEs (small and medium-sized enterprises) is an integral component of the economy system. But there are some difficulties when it comes to financing for SMEs in China, This study aims at describing the financing status of SMEs in China and investigates into why it is so difficult for SMEs to get financing service. A questionnaire is designed to study the financing difficulty of SMEs. It reveals that SMEs have to resort to external financing when they need fund to expand their business due to the fact that they have no sufficient internal fund. It is also difficult for SMEs to get external financing, especially bank loans.

Key Words: SME (small and medium-sized enterprise), financing, credit rationing, bank loan

CONTENTS

1.INTRODUCTION 4

1.1 What Is SME? 4

1.2 Development of SMEs in China 5

1.3 Financing for SMEs in China 5

1.4 Banks and SMEs Financing 7

1.5 The Financing Difficulty for SMEs 7

2. LITERATURE REVIEW 9

2.1 Financing Theory 9

2.2 Information Asymmetry and Financing Choices 10

2.3 Credit Rationing and Relationship Lending 11

2.4 SMEs' Financing Difficulty in China 13

3. THEORETICAL FRAMEWORK 15

3.1 Credit Rationing 15

4. METHODOLOGY 17

5. DATA ANALYSIS 19

5.1 General Information on Surveyees 19

5.2 Financing Status 22

5.2.1 Financing Demand 22

5.2.2 Financing Choice 23

5.3 SMEs' Difficulty in External Financing 25

6.CONCLUSION 29

REFERENCE 29

1.INTRODUCTION

Contributing a lot to the rapid development of the economy, SMEs (Small and Medium-sized Enterprises) is an essential part of the whole economy in China. One of the most important aspects with regard to SMEs is about their financing problem. Getting external loans from banks is a normal way for financing but it is relatively difficult for SMEs to get enough funds from banks in China due to various reasons. The constraint that SME faces in terms of financing now becomes the main block to the development of SMEs. Recently, the government, both at the national level and the provincial level, attaches great significance to the financing difficulty of SMEs. In this section, several facts about the financing situation for SMEs in China will be introduced in detail.

1.1 What Is SME?

For different economies, the definitions for SME are quite different. Several versions of official criterions for SME has been published since the foundation of China in 1949. The newest version, defined by indicators of number of employees, sales and the value of assets within different industries, was published in 2003. The specific conditions are listed in Table 1.1. This classification gives the specific description on how to distinguish whether an enterprise belongs to SME.

Table 1.1 Criterion for SME

Industry Number of Employees Sales(million Yuan) Assets(million Yuan)

Industry 0-2000 0-300 0-400

Building 0-3000 0-300 0-400

Wholesale 0-200 0-300

Retail 0-500 0-150

Transportation 0-3000 0-300

Postal 0-1000 0-300

Lodging & Catering 0-800 0-150

Source: http://www.3158.cn/news/20110118/10/72-501012623_1.shtml

Despite of the convenience this criterion brings to the authority when implementing policies, this classification is rather rough with only 7 industries which can not fully cover the whole economy. Besides, it also does not take account of the huge economic gaps among different regions in China. For example, a "poor" enterprise in the coastal region may be labelled as "rich " in some less-developed regions. Due to the big flaws the old criterion has, the government plans to modify it in order to make it more precise and specific.

1.2 Development of SMEs in China

According to the statistics of NBSC (National Bureau of Statistics of China), there are nearly 4.3 million SMEs until 2008, among which 3.8 million are self-employed enterprises. SMEs account for about 99% of all enterprises in the whole country. The fields that SMEs are involved include manufacturing, textile, metallurgy and so on. SMEs concentrate mainly in some labor-intensive industries. They create over 80% value of the food, paper and printing industry, 85% of the clothing, leather and stationery industry and over 90% of the timber, furniture industry. The rapid development of SMEs contributes a lot to the whole economy. It is obviously seen that SMEs contribute a lot to the whole economy in terms of employment, tax income, export and GDP.

Table 1.2 Contribution to the Economy by SMEs (%)

Employment Tax Income Export GDP

2004 71 42 58 54

2005 75 46 62 56

2006 75 48 68 58

2007 78 51 68 60

2008 80 51 68 60

2009 79 53 71 63

Source: data are sorted from http://www.sdpc.gov.cn/

1.3 Financing for SMEs in China

Financing can be divided into internal financing and external financing, including direct financing and indirect