Research On Financing Difficulties Of Small And Micro-sized Enterprises In China

SMEs, Small and Micro-sized Enterprises, together as a fundamental section of the Chinese economy, has been playing an important role in economy growth, society stabilization, citizens income growth, science innovation, etc. It is crucial that SMEs gets enough financing during its rapid growth. Yet it is frequently reported that SMEs has difficulties in financing in various ways. This has slowed and also restricted the growth of SMEs regardless how many privileges and policies the government and regulators have issued.Difficulties in financing for SMEs have drawn broad attention to the economists since they are so significant that they have great impact for the economy in both a realistic way and a theoretical way. Realistically, financing difficulties for SMEs can affect a single enterprise's performance, or the utilization of public resource; theoretically, it is important for studies in optimization of industrial structure, as well as economic restructuring in China. It's shown in some reports that the problems for SMEs mentioned above is not only caused by the enterprises themselves, but also the financial structure. Current researches mainly focus on Financial Structure & Economic Development, SMEs'financing system and financing methods. However, the result is far less than perfect. The reason is that the existing researches overlooked the correlation between our current financial structure and the financing problems for SMEs. Therefore, the most effective way to solve SMEs'financing problems is to study systematically on the financial structure perspective, do empirical study to determine key factors that affect SMEs'financing, thereby to get an objective and suggestive solution for the problem.The current financial structure of China is significantly characterized as bank dominated, state-owned industry monopolized, lack of financial innovation and unbalanced financial markets. Although China has built up a considerately multi-functional and multi-sourced financial system, the diversification of financial institutes is still a problem. Banks taking such a big portion in the market has caused a unbalanced financial market and has resulted serial consequences.There are two ways for companies to finance under most circumstances-internal and external (direct and indirect). According to Pecking Order Theory, the preference for financing is most likely to be Internal>Debt>Equity. But it's hard to compare different financing methods in a traditional way, or to find out the effect of financial structure during the whole circle of financing. Hence there are usually more ways to analyze SMEs'financing:traditional, capital market and Fintech. After building up a panorama of all three methods mentioned above, we can analyze such issue from a more Macro view.High costs, lack of financing methods and low bargain power make SMEs' financing even harder. It's also hard for SMEs to finance from equity market, or debt market. SMEs are facing higher interest rate if they want to get loans from the banks. For those who cannot satisfy the requirements of the banks, they will have to finance in a more expensive and less regulated way with some institutes such as private lending firms, etc.Mostly referred as "traditional" financing for SMEs includes internal financing, banking, private lending, leasing, trust,etc. Banking is the most important way for SMEs'financing in both developed countries and developing countries. In China, CBRC has issued a policy call "three must above", it evaluates Chinese banks' performances in supporting SMEs in three dimensions such as growth rate of loans made, number of SMEs supported and ratio of SMEs'applications approved. Until June 2016, only state-owned banks meet the requirements of the policy mentioned above. On the other hand, financing from private lending or bonding companies forces SMEs to face a higher cost with a lower entry barrier.Capital market financing usually includes regional equity market, NEEQ, main board, growth enterprise board, SME board, VC, PE, etc. Regional equity market has limit impact for the growth of SMEs due to its less regulated nature. NEEQ on the other hand, is the most popular channel for SMEs to finance in recent years. NEEQ is built to provide financial service for newly started companies nationwide. The entry barrier for NEEQ is comparably low and has no requirement for profitability for those companies that are legally funded and operated, with a consecutive operating period more than 2 years and a complete financial structure. For its convenience and effectiveness, NEEQ is called the "Chinese NASDQ". VC and PE have a preference for those companies with high technology, they help these companies to realize their goals as well as get a high rate of return themselves. Capital market financing has also made its effort to the growth of the whole economy and the optimization of the financial structure.Fintech includes P2P, crowd funding, big data finance, supply chain finance, etc. P2P is considered to be a transformation of private lending, though in a more public and internet related way. It drains the spare money from separate individuals to other individuals, companies or SMEs who need financing effectively. But P2P is under a more severe supervision of the regulators currently. Big data finance and supply chain finance are using the internet as a basic tool to get and analyze the relevant data to determine and quantify the risk, thereby to offer SMEs a reasonable cost of financing, sometimes even with no mortgage. It is now a new trend for the reformation of financial structure.Comparing the three financing methods discussed above, for SMEs, banking loans take the most portion of all their financing. The cost is comparably low with internal financing, banking and mortgage. Internal financing, private lending, P2P, crowd funding, big data finance and supply chain finance are with lower entry barrier and faster speed, but they also ask for a higher compensate for risk. NEEQ, VC and PE are more likely to have a positive influence in the long term. And finally, P2P, big data finance and supply chain finance are making increasing contribution during the most recent years.Huge amount, time urgent, high risk, expensive, and grow demand for equity finance are the most significant characteristics for today's SMEs'financing. According to Financial Exclusion Theory, financial structure has series exclusions for SMEs in China. The existing financial structure now in China doesn't match SMEs' characteristics very well. By doing statistical researches, the author finds that the bigger the size of the financial institutes are, the smaller the portion of SMEs financing they make, and the smaller the size of the financial institutes are, the bigger the portion of SMEs financing they make; the more state-owned capital in the financial institutes is, the less financing those institutes make to SMEs; and among those financial institutes with state-owned capital, the more the central-owned capital is, the less SMEs'financing they make, the more local-government-owned capital is, the more SMEs'financing they make. On the other hand, the imperfection of capital markets also leads to a lower percentage of direct financing among SMEs, compared to other cataloged companies. Furthermore, the regulation system puts a barrier for SMEs to finance due to its harsh overall regulations, strict interest rate control system and financial order rectification. China's financial system is in fact in a "Financial Repression". The whole financial system is lack of innovation compared to the speed of China's economic growth so that the system cannot fully play its role as the inter-media between capital and the real industry. Besides, an unbalanced guarantee system is also causing a higher trading cost as well. Even though the government and regulators keep releasing new policies and regulations, it is hard to see a distinct impact, since most of these policies and regulations are not reforming the whole finance structure.By doing an empirical analysis of the sample SMEs from NEEQ, the author gets four conclusions. First of all, among all micro-factors that might have influences for SMEs to get financed, "scale" is the only statistically significant factor, in which the "total assets" is the factor that has positive impact. Secondly, neither of the type of a single company, nor the financial situation of the company, which includes current ratio, profitability and debt to assets ratio, is significant. This shows that SMEs have high credit risk and unreliable financial reports that are likely to make negative contribution for banks to evaluate their risks for loans. Thirdly, difficulties SMEs facing when financing is a nationwide problem, even companies in the relatively more developed area, such as the east side of China, are facing the similar situation. Lastly, according to the outcome,72.86%of SMEs are financed by small & medium sized banks, which show the importance of small &medium sized banks for SMEs' financing.By doing further panel data analysis, the author gets three more detailed conclusions. Firstly, among all macro-factors that might have influences for SMEs to get financed, the state of development of the small &medium sized banks, and the state of the finance system is significant, while the ratio of bank-financing and capital market-financing is not significant. This shows that the state of development of small &medium sized banks is a key measurement to financial structure optimization, hence it comes to the conclusion that the optimization of financial structure is the most desirable solution for SMEs'financing problem. Secondly, the demand of financing for SMEs is rigid, which means that SMEs have no other option but to take the high interest rate in order to survive and make further progress. This is another prove of the fact that SMEs are facing lots of difficulties in financing. Finally, we can see nearly no difference between innovative companies and other companies in NEEQ, which suggests that the convenient financing, which NEEQ is supposed to offer for innovative companies is not fully employed. China should make more effort to develop innovative capital market such as NEEQ.By analyzing the financial structure and the SMEs financing system of United States, Germany and India, the author finds that there are three types of systems: Market-oriented (US); Market-Government balanced (Germany); and Government-oriented (India). All three countries take the financial structure as an important element of SMEs'financing. Regulators in each of the countries have made systematic policies and regulations to ensure SMEs to get enough finance.A systematic financial structure reformation is more than necessary for solving SMEs'financing problem. Financial institutes, financial instrument and financial market should be developed simultaneously. "Systematic financial structure reformation", "market-oriented, governments assisting" and "financial structure pluralism" should be considered as basic laws of our financial structure optimization. A proper and functional financial structure should agree with a concordant relationship between the government and the market, a clear path of financing for SMEs both directly and indirectly, and a consistent financial structure that meets SMEs'characteristic financing demand. Moreover, in order to solve the problems of SMEs'financing ultimately, the financial structure optimization should be done by supporting innovative, high-tech supported and environmental friendly SMEs, making promoting policies and creating compatible financial instrument for those companies of the supply front. Hence more capital can be driven to more promising industries rather than excessive productive industries, the optimization and reformation of the whole financial system can be realized. The reformation of the financial system can be done by adjusting the existing structure of financial institutes to fit SMEs' financing characters. Furthermore, by using proper financial instruments, private lending should be more publicized and permitted to banking system, insurance market and security market under proper supervision. It can improve the utilization of private lending and promisingly make affirmative effort for solving SMEs' financing difficulties.Specifically, deepening the reformation of commercial banks, especially encouraging small & medium sized banks can have positive influence for solving SMEs'financing problem. Also, by establishing policy-oriented financial institutes, expediting multi-level capital market, regulating private lending, focusing in Fintech. stabilizing the foundation of finance structure, optimizing the financial regulation system, establishing social credit system and perfecting financial guarantee system for SMEs, we can reform and optimize our financial structure, consequently to develop our financial system. Under a stable and sustainable growth rate of the economy, we can also establish special bureaus that are directly supervised by the State Council to do specific researches and make specific policies for SMEs. By doing all of the methods mentioned above progressively, it is affirmative that the difficulties SMEs have in financing will be solved effectively in the foreseeable further.