Small business policies need structural reform
- By Zhang Lijuan
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China.org.cn, November 1, 2011
Compared with governments in other leading economies, Chinese government has pursued a unique economic strategy. After 30 years of breakneck growth, the Chinese economy now is facing serious challenges. The test now is whether the Chinese government will create an institutional regime within which entrepreneurship can flourish. Only this type of structural change will provide the economy with sustainable power for continued development.
Small businesses cannot develop without effective financing and an effective banking system. If banks only lend to state-owned enterprises (SOEs), the national economy is in grave danger, because small businesses create more jobs than SOEs.
Poorly structured banking regulations hold small businesses back. Government action should direct banks to increase lending to private businesses while also demanding banks to build up their reserves to avoid a future financial crisis.
Meanwhile, because the Chinese banking system is far removed from the demands of the market economy, underground finance has flourished in southern China. When small businesses cannot get loans from banks, they turn informal shadow lenders, which provide sufficient funds at prohibitively high interest rates.
For desperate entrepreneurs, these channels became the only way out. But when business slowed, the interest became too much, and many business owners in Wenzhou chose to flee the country or go into hiding to avoid repaying their debts.
China has a unique financial system. The common understanding is that SOEs have received an implicit guarantee by the government should they go into default. But small businesses do not have such insurance, and default risk is the biggest concern for banks. The continuing dilemma will have a big impact on the future of China's economy.
On its face, China is rich in cash with huge trade surpluses and foreign reserves. But beneath the surface, there is not enough money to support business development. If people do not see reasonable improvements in their living standards, particularly those living in China's rural areas, the consequences will be dire. The public is increasingly concerned about inflation, the dearth of sound investment opportunities, and social instability.
On the surface, the issue is about small business development. But the implications for China are huge. If China's small business owners continue to face financing difficulties and Chinese society continues to suffer from a worsening credibility gap, then the entire Chinese economy will be in jeopardy. While government officials in China are complacent about local GDP growth, it is time for them to think about private business owners. They are the real factors that will sustain the Chinese economy.
The author is a columnist with China.org.cn. For more information please visit: http://www.shenbo75.com/opinion/zhanglijuan.htm
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