Illustration: iStock
Illustration: iStock

Small companies in China are starting to feel the pinch after being squeezed in a vice of rising trade tensions and Beijing’s war on cheap credit.

In a move to ease monetary policy, which had been tightened to clamp down on debt bubbles forming in state-owned enterprises and the broader corporate world, major banks have been told to boost support for “small and micro businesses.”

Growing fears of a full-blown trade war with the United States have also played a role in the decision, as well as weaker growth data released last week for May.

“The Chinese government will roll out a series of incentives to make financing more accessible and affordable for small and micro businesses to promote cost-cutting in the real economy,” the State Council, which is the legislative branch of the Chinese government, stated in a report by Xinhua, the country’s official news agency.

Chaired by Premier Li Keqiang, the executive meeting pledged to raise investment and reduce funding costs by using targeted cuts in the reserve requirement ratios, or RRR, for leading banks.

Sluggish economy

This, in turn, will help small companies, particularly in the high-tech sector, struggling with increased costs and a sluggish economy.

“Vigorous efforts must be made to improve the accessibility of affordable financing for small and micro businesses,” Li said. “The banking sector must implement policy measures in a well-coordinated way to reduce financing costs for businesses.”

During the past three months, Beijing has started to focus on the problem after lines of credit dried up following the government’s concerted campaign to control excessive borrowing across the economy.

There were also concerns about weak data released last week by the National Bureau of Statistics, which showed that investment, retail sales and industrial output dipped last month.

“Small and micro businesses are leading job providers, and many of them have strong potential for growth,” Li said. “Their robust development will help achieve high-quality growth and improve people’s wellbeing.”

These have been tough times for some small companies, which have been buffeted on an array of fronts, including the tit-for-tat trade conflict between Washington and Beijing.

While many are still thriving, others are hanging on by their fingernails.

“The European Chamber urges China to follow through on its promises of reform and opening-up that have been repeatedly stated since President Xi’s speech to the World Economic Forum in January 2017″

“Overall, we believe small-cap companies are at the forefront of the country’s economic shift toward innovation, consumption and services,” Tiffany Hsiao, a portfolio manager at global asset managers Matthews Asia, told Money Observer, a British monthly personal finance and investment magazine.

“The amount of innovation developing in the more entrepreneurial regions is promising and smaller Chinese companies are tapping into it,” she added.

Still, as the world’s second-largest economy prepares to further open up its markets, they will also face mounting competition from overseas rivals, but not just yet.

Already there have been rumblings from the European Union Chamber of Commerce in China that Beijing continues to drag out the process, despite President Xi Jinping’s “promise” to increase access to foreign firms.

In its annual business confidence survey, the EUCCC reported that doing business in the country had become more challenging during the past year as companies face regulatory barriers, market-access restrictions and unequal treatment.

“The European Chamber urges China to follow through on its promises of reform and opening-up that have been repeatedly stated since President Xi’s speech to the World Economic Forum in January 2017,” the business group, which represents more than 1,600 foreign firms, stated in the report.

“While some of these pledges have been written into legislation, European companies have yet to see much real concrete implementation,” it added.

Protectionist policies

Chamber of Commerce President Mats Harborn stressed that Chinese companies have become “stronger” under Beijing’s protectionist policies and called for those “barriers” to be taken down.

Crucially, this would produce a level playing field for EU firms that are still grappling with excessive red tape.

“Now that Chinese companies are clearly becoming stronger and more competitive, it is time for China to remove the training wheels in order to create a sustainable economy in the long term,” Harborn said in a statement.

“We have seen improvements this year in areas such as law enforcement, but we are still far from an environment that fosters fair competition,” he added.

Harborn will be hoping this latest plea does not fall on deaf ears in Beijing’s corridors of power.