What funding options can COVID-hit SMEs seek, besides government support
A shopping mall reopened in Shanghai. /CFP
A shopping mall reopened in Shanghai. /CFP
Editor's note: Jimmy Zhu is chief strategist at Fullerton Research. The article reflects the author's opinion, and not necessarily the views of CGTN.
Most businesses in China's financial hub Shanghai resumed operations in June after the city brought the newest wave of Omicron under control. Unfortunately, the recovery path for small and medium-sized enterprises (SMEs) might be more challenging for they have been hit harder by the pandemic than larger companies, and are facing difficulties in funding and supply chain.
Since employees working in SMEs generally return to work later than those in big companies, SMEs' cash flow positions have been more severely affected.
This was reflected in China's manufacturing Purchasing Managers' Index (PMI), which comes with the benchmark of 50, territory above it means economic expansion, while below it reads contraction. The PMI for small-sized companies was 46.7 in May, much lower than 51.0 for large-sized companies.
The Chinese government has rolled out a slew of measures to support SMEs to tide over difficulties. For example, the central bank called on commercial banks to increase lending and reduce borrowing costs for SMEs in the past few weeks.
However, some commercial banks are still cautious to largely increase their lending to some SMEs at this stage, given the uncertain cashflow outlook.
Thus, SMEs should also consider the private equity market as an alternative source of funding to obtain long-term growth capital.
Compared to banks lending with a fixed rate, funding through the private equity market would be more market-oriented, encouraging the borrowers to utilize the funding more effectively as investors would consistently review whether the companies they invest in are on the right track of the long-term business plans.
In addition, funding through the private equity market provides SMEs with opportunities to list in the public market if their revenues continue to grow. Therefore, local authorities and regulators can introduce more policies to support more companies to go public.
For example, regulators may speed up the approval process or ease the listing requirement to allow more small companies to meet the listing requirement. In order for these companies to attract more investment, they need to find more growth engines to make their earnings more sustainable.
The private sector in China accounts for around 60 percent of the nation's gross domestic product (GDP) and 80 percent of the entire labor market, and many of the companies belong to the SMEs category. The strength of the labor market will have a direct impact on private consumption, which has accounted for almost 40 percent of the nominal GDP in recent years. Nominal GDP is calculated using current prices, while real GDP measures output using constant prices.
Restoring confidence in SMEs is a crucial step to accelerating economic recovery and making it more sustainable.
With increasing monetary support and most businesses reopened, we should expect a sharp rebound in credit data in May after it slowed sharply in the previous month. Any pickup in broad-based loans in the private sector would quickly restore SMEs' confidence and allow them to increase investment or expand hiring.
Caution shortages in supply chain
Spending data from the Dragon Boat Festival long weekend showed domestic tourism revenue fell 12.2 percent from a year ago, a much narrower decline than the 43 percent plunge during the national Labor Day holiday. This data shows that a strong rebound in consumption in the coming months should be widely expected.
Pent-up demand in the post-pandemic era would sometimes cause supply chain shortages , and this is one of the key reasons that large companies tend to outperform SMEs in this period given the sufficient inventory they hold. Therefore, SMEs in different industries need to analyze the potential shortage of key materials and find alternatives as soon as possible.
Overseas experience in the past two years suggests that supply chain shortages are holding back business activities and ultimately hurting company revenue. Thus, SMEs need to review current business models, as changes may happen to the customers and their needs in the post-pandemic era. For example, restaurants may find that their customers are decreasing, and demand for delivery services is increasing.
The restaurants have to make adjustments in advance, such as starting to engage more delivery men and transportation services to cope with these changes and maximize their revenue. Similar review strategies apply to most of the companies, from manufacturing to service companies.
We expect there will be more monetary and fiscal stimulus to support economic growth, which will be a very good opportunity for SMEs to generate more revenue.
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