Theoretical Analysis Of The Root Causes Of Economic Transition In China Sme Financing Constraints

Since the beginning of transformation and opening up, SMEs (small& medialenterprises) have become an important force in Chinese economic development. Theyhave played a pivotal role in the creation of social wealth, developing nationaleconomy and easing the pressure on employment and upgrading the competitivepower. Since the end of the 1980s, the voice of "financing difficulties" for SMEs hasemerged in China. Many experts and scholars had eyes to this topic, and did lots ofresearches and gave many valuable policy suggestions.This study is on a basis of economic transformation. Although growing rapidlyduring the economic transformation period, SMEs face financing difficulties becauseof lagging behind and inadequate financing system. The thesis, usingSME-financing-theory, according to Chinese status-quo, analyzes the reasons offinancing difficulties for SMEs from financial institutions and markets microperspective, and gives related solutions.In the first part, from general to specific through the ideas, the thesis dissertatesfinancing theories and the characteristics of Chinese economic transition, andanalyzes the status of the financing of SMEs.SMEs have special financing theories though following general corporate financelaw. In the information asymmetry conditions, the major financing theories can besummarized as credit rationing theory, the financing cycle theory, the relation loantheory and the relevant empirical studies. Compared with large enterprises, SMEshave serious information asymmetries. And because of small scale, imperfectcompany management structure, lower reputation of the individual entrepreneurs,there is a high possibility of the reverse selection and risk of moral hazard.In the process of economic transformation, SMEs in China are facing a specialfinancing environment: a high degree of monopoly banking, less small-medialfinancial institutions, difficult market access, the slow development of the capitalmarket, and lagging behind policy transmission mechanism. SMEs financingstructures can be summarized as: owned fund is the basic source for the creation ofenterprises;credit fund is the main sources for the continued operation for the SMEs;commercial credit and civil lending is an important source.In the second part, the thesis analyzes the reason of financial plight for SMEs,mainly from the four aspects: lagging behind financial system, potential financialrisks, social credit system stunting, problems for SMEs themselves.Chinese financial system is still not standardized and improved. Indirectfinancing takes the main place of SMEs financing. The monopoly of commercialbanks and serious shortage of direct funding makes difficult to get loan for SMEs.Although we have established SME board, but the listing number and funding ofSMEs compared with the actual demand is inadequate. Moreover, non-standardprivate financial markets activity increased the volatility of uncertainty for SMEs.And it makes hard for SMEs to establish healthy, long-term cooperation with theformal financial institutions.Potential financial risk is one of the major reasons which makes financialinstitutions not want lend money to SMEs. High non-performing asset ratio ofcommercial banks is pressure for Chinese financial and economic system, and in 2006Chinese financial sector will directly face the competition of international financialinstitutions. Under internal and external pressures, the four big state-ownedcommercial banks and other financial institutions to take collateral-based creditrationing strategy, thereby worsening the SMEs' financing environment. In addition,although the SME board has opened, inadequate information disclosure and integritydeficiencies, and other issues have increased the risk of SMEs board.It is a major principle for enterprises to have credit. It is also one of the importantcriteria for evaluating enterprise. Our community credit rating system started ratherlate and inadequate. Enterprises can obtain loans elsewhere though making defaultwith one commercial bank. In this environment, lenders are more cautious in thesearch for the item, which makes SME borrowers to obtain funds more difficult.In addition, SMEs' little fixed asset, unsound internal rules and regulations,operating risks result in the phenomenon of financial difficult.In the basis of the above analysis, in the third part we give some policysuggestions.From the current situation, we must increase government support for SMEsfinancing, and establish a coordinated system of financial support, and use strict lawsto prevent moral hazard. In the long run, we must improve Chinese financial marketsystem aggressive and steadily, broaden the financing channels for SMEs, andinnovate new ways of financing. On the other hand, we must accelerate the socialcredit system, improve SMEs' corporate management structure and their own credit.