China will see faster growth of
small and medium enterprises (SMEs) in the western provinces if the
government accelerates law reforms, streamlines registration and
administrative procedures for SMEs, promotes training and life-long
learning, and improves their access to finance, according to a
recent World Bank study.
The three biggest issues for SMEs in
southwest China, according to the study on Investment Climate for
Small and Medium Enterprises in Southwest China, are (1) barriers
to business entry and exit; (2) inadequate skills and technology
endowments; and (3) poor integration with coastal and export
markets. Additional investment climate issues include labor
flexibility, access to finance, tax burdens, and efficiency of the
courts in resolving commercial disputes. The World Bank undertook
this assessment of the investment climate for SMEs in Yunnan,
Guizhou and Guangxi at the request of the Office of the Leading
Group for Western Region Development of the State Council.
Business registration can be
expensive and time consuming. Under China's current company law,
RMB 500,000 minimum capital is required to register a manufacturing
business as a limited liability company. This represents a high
1237% of per capita GDP. In addition, the registration of new
businesses can take twice as long in the Southwest as in coastal
China, and businesses in southwest China may be subject to onerous
licensing, regulatory, and inspection requirements. Recommendations
made in the study include reform of China's Company Law, to reduce
registration costs, and streamlining of licensing requirements and
inspections.
Continued operations by loss-making
state-owned enterprises (SOEs) also hurt local investment climate,
for example, by encouraging excessive price competition and
absorbing labor and capital in unproductive uses. The study urges
accelerated sale of remaining small and medium SOEs to private
investors. Further development of social safety nets should be
relied on to provide protection to any redundant workers.
In several Southwest cities, firms
appear to be below-average in terms of percentages of trained staff
and technical staff. Some Southwest provinces also have a shortage
of well-trained business professionals and general managers.
Government-sponsored business development services, however, are
not the answer. Rather, the study suggests development of programs
to promote "life-long learning" and to move western provinces,
along with all of China, more toward becoming a knowledge
economy.
Southwestern producers are poorly
integrated with coastal and export markets. Immediate
liberalization of entry by domestic and foreign firms into all
transport and logistics service sectors would reduce costs and
improve service, and thereby address the Southwest's geographical
disadvantage. New legislation to allow the organization of
cooperative-type farmers associations would make it easier for
rural producers to invest in supply chain assets and make it more
efficient and profitable to sell food products, cut flowers,
traditional medicine, and other rural products in coastal and
export markets.
Access to finance is a special
problem for SMEs. The study suggests that credit guarantee
facilities are not the answer. Rather, the best ways to improve SME
lending would be to liberalize interest rates on loans and entry
into financial services, pass new market-oriented laws on
bankruptcy and collateral, develop registries to permit a broader
range of SME assets (e.g., inventory) to serve as collateral, and
encourage international best practices among local banks in SME
lending. Lastly, the local investment climate would benefit from
more transparent, fair, and efficient approaches to tax
administration and resolution of commercial disputes.
(China.org.cn December 20, 2004)