Essay On Fiscal Policies For Innovative SME Financing

China’s economy has entered into the "New Normal" stage, which is presenting new consumption, industry strucutural, demographic and environmental features, in the process of an on-going exploration and nurture of new economic growth engine, and at a critical period for economic growth engine shifiting and restructuring. Small and Medium Enterprises (SMEs) are very important players at this time in the following three areas. First, being the most vibrant factor of economic development as well as sources of product innovation, business model innovation, and industry innovation, SMEs could discover new economic growth opportunities by mobilizing the wisdom of the crowd. Second, SMEs could help the economy grow at a moderate speed to win more time for economic restructure given that 99% of China’s enterprises are SMEs and they contributed more than 60% of China’s GDP. Third, SMEs are offering a lot of jobs, especially for the less skilled workers, and alternatively providing basic subsistences for them and maintaining social stability, thus lending the widest support to necessary economic reforms and institutional changes.Financing has been a long-standing issue for SME development in China. An important reason is the credit rationing due to information asymmetry between SMEs and financial institutions. China has already put in place many fiscal policies, including subsidizing guarantees to SME financing and unloading tax and charge burdens to encourage banks and other financial institutions to provide financial support to SMEs, and these policies have made some progress. But the financing issue remains and requires government to change and improve its fiscal policies.The fast developing venture capital and Internet finance in recent years are new promising financing channels for SMEs since they can overcome many of the obstacles in SME financing, offer new financing channels and can also press conventional financial institutions to change and offer more financing to SMEs. They could be very good channels for fiscal policies to intervene and help solving the SME financing problem.Based on previous work of others, this thesis tries to analyze from theoretical and emprirical perspectives the measures and effectiveness of fiscal policies in solving China’s SME financing problem, and result shows that fical policies have significant positive impact on SME financing, and should intervene in ways that could lead financial institutions into active involvement by providing subsidies for their value-added services to SMEs, and by supporting the development of venture capital and Internet finance, and be more selective according to the ownership, industry and financial constraints of SMEs.The thesis has done the following work:First, it surveys the work already done in the field, reviews theoretical foundations for SME financing and fiscal intervention and related literature. It studies theories explaining SME capital structures such as capital structure theory, financial growth cycle theory; theories explaining the reasons for SME financing problem such as credit rationing and financial repress and financial deepening theory; theories laying the foundation for fiscal intervention such as market failure and externality. Researchers have already laid sound theoretical foundation for SME financing and related fiscal intervention, which covers the effects of various financial structures, the preferences over financial tools, the choices of financial tools at different phases of growth, and also the impacts of distorted finanical system on SME financing in developing countries. Based on information asymmetry and financial repress theory, Chinese researchers proposed a few valuable policies. However, most of these policies focused on banking finance, and there’re insufficient researches on non-bank finance and fiscal policies for SME financing.Second, it profiles the status quo of SMEs and SME financing in China. It analyses the distribution of SMEs across different ownership, industries and regions, and finds out that there’s imbalance among regions, and SMEs in Western China are not as good as those in other parts of China; most SMEs are in labor intensive industries and having less advanced equipment, and are less competitive and less profitable; SMEs are not well managed; SMEs are vulnerable to risks, and the financial crisis negatively impacts them. It also finds out SMEs rely heavily on internal financial sources, and banks are the only available formal external finanicing sources at most of the times, and more than often SMEs have to turn to informal financial sources. SMEs always have to take significant term structure risks and to accept high borrowing cost due to lack of finance, which severly dampened their growth and development potential. The thesis studies the sources of this problem, and points out that the underdeveloped financial system, inability and unwillingness of financial institutions to innovate, and the problems of fiscal systems are the three major reasons for SME financing.Third, it surveys foreign fiscal policies regarding SME financing problem and the issues of China’s fiscal policies, and pointed out that China should improve fiscal policies, and compares the performance of subsidy to guarantees and subsidy to vaule-added services which could potentially raise the success rate of SME projects, and finds out the latter performes better. It then uses data from listed companies in the SME Board and ChiNext Board to study the impact of government subsidies to SME financing, and proves that government subsidies have significant influences on SME financing. It studies the impacts of fiscal policies on listed companies of different ownership, in different industry, and financial constrainted companies, and results show that subsidies to non-State-Owned-Enterprises, to industries other than real eatates and construction, and to less financial constrainted companies would likely to have significant impacts, which provides theoretical foundations for policy interventions.Fourth, it profiles the internal structure of SMEs from life cycle, growth potential and market power perspectives and pointed out that SMEs are quite diversified and require more complicated financial systems to match its financing needs. The fast growing venture capital and Internel finance match SMEs financing needs, and also can press conventional financial institutions to change so that they are good breakthrough points for SME financing. Under current economic and institutional conditions, fiscal policies should work closely with these innovative financing channels to amplify the fical input and get the best results.Finanlly, it proposes policies to support innovative SME financing channels, including creating favorable fiscal environment, supporting venture capitals, P2P lending platforms, and crowd-funding platforms, and encouraging SMEs to get financed through these channels.