Small&Medium Enterprises Credit Constrins And Wage Income: Explaning Low Consumption In China

China has reached an important point of its development in the aftermath of the global financial crisis. Its economy is moving away from export-oriented, low-end manufacturing, in an attempt to create stronger domestic economy and a more sustainable economic growth model. The main obstacle ahead however, is the low household consumption levels. Thus, understanding what stimulates or constrains domestic demand is a challenge we undertake with this research, for this issue could be essential for the development of China's domestic economy, and thus its long-term economic growth, prosperity, and social harmony.Instead of looking for answers in Chinese culture and history though, this research concentrates on defining conventional economic forces behind the shaping of the Chinese consumer's spending tendencies (or rather the lack of them). We find that the transition from planned to market economy has brought drastic policy reversals. Mainly, the dismantling of the public sector has brought higher unemployment and has broken the social safety net which has provided retirement benefits, health care, and housing to the public. As a result, higher social uncertainty has increased the need for precautionary savings and thus has prevented higher household consumption. And yet, it is essential to realize that savings incentives have lead to even lower consumption, but have not caused it.This paper will argue that due to slow job creation and existing credit constraints mainly to smaller enterprises, wages have failed to keep up with the fast economic growth rates in China, and are significant reason for the lower domestic consumption. We use survey data from 2005 covering 12400 firms all across China. At the end, we find that credit constraints (access to finance and financing cost) is the most severe constrains on business growth and operations according to the company managers. More specifically, by using the Principle Component Analysis, we conclude that credit constraints not only have negative effect on employment levels, but they also are one of the most significant obstacles to labour growth for Chinese firms. The constraints on labour have eventually affected Chinese households' income growth and, thus have led to lower private consumption.