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SMEs play vital role in economy

By You Nuo (China Daily)
Updated: 2008-12-15 07:37

People in Beijing have been quietly, and not so quietly, saying that for all its ups and downs, 2008 has still not seen its most daunting challenge to the economy.

But what will 2009's challenge be like? At the moment, people do not seem to have enough data to quantify. But one thing is sure: China cannot rest assured on the 4 trillion yuan ($600 billion) stimulus package.

A large investment in public infrastructure is necessary - for generating off-farm jobs and for workers to send money to their relatives in their home villages. But by nature, they are future development plans, not contingency ones. Many of them, if not all, had already been planned in engineering and fiscal budgets to match future development demands. The only difference is that in order to resist the global financial crisis and its repercussions, the launch date of the projects may have been moved forward.

But there could be some mismatches. The national-level infrastructure projects (meaning the ones at the top of Beijing's funding program) will tend to take place in China's central and western regions. While it is the coastal industrial cities, which have no pressing need for more major infrastructure projects, that will bear the brunt of the financial tsunami.

Infrastructure projects, even if they all get started at once (which is unlikely), will still take at least a few months, if not much longer, for them to begin to generate opportunities for other sectors of the economy. The coastal cities therefore need a stronger and more instant stimulus.

There will also be a difference in the nature of jobs. The kind that come with infrastructure projects are those in construction more suited to men, while those threatened or wiped out by global recession will likely be assembly line jobs in which many women are employed. If as officials predict the toughest time is still to come, then job losses in the coastal cities may spread from the manufacturing sector to all sectors, including small and medium-sized enterprises (SMEs).

We must not forget that SMEs are the mainstay of urban jobs and the entrepreneurial spirit of the society. Any economic program would be incomplete without providing incentives to SMEs. Their role in sustaining jobs can never be replaced by State endeavors, including the job opportunities in infrastructure development.

Having said that, it is easy to see why the 4 trillion yuan stimulus package, despite its impressive figure, is far from enough to help the economy cope with the crisis. More substantial support is needed to buttress the first defense line, namely the SMEs in the coastal cities. China cannot afford to wait until the tsunami has swallowed most of them, leading recession to spread from its once strong industrial centers to the less defensive inland provinces.

Investment in public infrastructure is important, and it would be a mistake to deny it. But China's economy and its population all call for more policy innovations than simply following the Keynesian strategy.

China's SMEs are a relatively simple group of companies - unlike the American banks. So their incentives could also be simple - a cut in business tax (most importantly value-added tax as it is called in China) and a relaxation in their hiring policies could suffice. In total this would not cost nearly as much as the budgeted spending of 4 trillion yuan.

The real challenge it seems is how the difficulties facing the SMEs and their workers can be channeled into the decision making process. I am sure China will hear a lot about it during debates at the national legislature's 2009 session, scheduled in early March.

E-mail:younuo@chinadaily.com.cn