The Research On China's Small Business Financing System

With the shift out of planned economy into socialist market economy, vast majority of small and midsize businesses such as individual businessmen, town and township enterprises, private firms and foreign corporations are able to exist and grow. They have contributed and are still contributing considerably to support and sustain the national economic growth. Up until 2003, more than 3,600,000 small and midsize businesses have registered at Industrial and Commercial Administrative Bureau, that of the individual businesses, among others, over 27,900,000. They have created over 75% of the jobs, thereby becoming the leading sector in soaking up employment. These firms account for 55.6% of the value of GDP final products and services, 74.7% of the newly-accrued value of industrial products, 62.3% of the export respectively. They have also become the dominant vehicle of technological and mechanism innovation, contributing 65%of the patents, over 75%of the technological innovations and over 80%of the new products.To support the development of small and midsize firms, based on the financing problems confronting these firms, People's Bank released "proposals about further bettering the financial services toward small and midsize businesses". At the end of 1999, People's Bank once again issued "directive advice on strengthening and improving financial services in favor of small and midsize businesses", requiring that financial institutions strengthen and improve their financial support to small and midsize businesses. Even so, small and midsize businesses still find themselves stuck into funding difficulties. Up until the end of 2002, the total amount of loans by small and midsize businesses merely account for 6% of all the loans from the banks, with a very small number of these firms raising funds via Shenzhen and Shanghai SEC. All these result in their slow progress. Econometric regression analysis reveals that only personal assets and foreign capital brought about due economic efficiency, while the other three methods of funding support from relevant sectors, loans from financial institutions and some other capital have turned out to retard the development of these firms. This demonstrates that to grow fully and sufficiently under the reform and open policy, small and midsize businesses would have to expand their finance channel and capital by legal means as well as accumulating personal funds.The finance problem presented before the small and midsize businesses has not yet been solved effectively although relevant departments have taken measures to promote finance for them. Here several reasons are listed. First, this problem is endogenized in the traditional financial management system of "catching up and surpass" strategy. This "catching up and surpass" strategy insists on investing preferentially on those capital-intensive heavy firms with large investment scale, long construction circle and imported equipment. However, this is in conflict with the high interest rate determined by lack of endowments of capital resources, and it is also incompatible with the weak ability of raising funds induced by the fact that a very small amount of economic surplus scattering in the countryside. In view of this, government adopted a financial system design which objectively eliminate market mechanism at an over-all scale, artificially reducing interest rate, establishing strict financial market access standards, restricting foreigners from entering, which gradually resulted in highly monopolized at the financial market by national banks. In order to cope with the situation that market capital demand surpasses supply due to low interest rate, government makes it plausible to allocate capital in those large-scale companies which fit the government development strategic objectives. This is implemented by way of credit subsidies or mandatory planning via national banks, hence a highly centralized and unified traditional financial management system. Since the reform and open policy, the financial system design endogenized in the "catching u...