China Aims to Help Small Businesses

BEIJING?China has rolled out temporary tax cuts and promises of fresh credit for small businesses that have been hit hard as economic growth slows, but the move will have only a limited impact on the economy, analysts said.

The measures are aimed at giving small firms a helping hand and in turn boosting economic growth as the economy appears to lose steam.

On Friday, the central bank said it would encourage banks to lend more to smaller firms and it would encourage these companies to tap the bond market for financing. That followed an announcement by the State Council, or China's cabinet, on Wednesday that it would temporarily suspend business and value-added taxes for companies with monthly revenue under 20,000 yuan ($3,260) starting Aug. 1.

Small and medium-size enterprises account for 80% of China's urban jobs, according to the Ministry of Industry and Information Technology. But they often find themselves hard-pressed to get financing, with banks preferring to make loans to larger companies.

Still, economists said the move wouldn't significantly open up new channels of credit. "The reality is the banking system is not set up to serve SMEs," said Liu Li-Gang, at economist at Australia & New Zealand Banking Group, referring to small and medium-size enterprises. "This will probably not be that effective."

The central bank said on its website that it would use monetary tools to support smaller firms. It didn't give specifics on its plans and ultimately the banks will decide for themselves where to lend. But the central bank delivered the same message in a commentary by People's Bank of China Gov. Zhou Xiaochuan in the Communist Party mouthpiece People's Daily on Friday, adding weight to the move.

In an apparently related development, China Citic Bank, the country's seventh-biggest lender by assets, said Thursday it had received regulatory backing to issue 30 billion yuan of bonds to support small businesses.

Earlier in the week the State Council said that its tax cuts would benefit six million firms and tens of millions of workers. That suggests that the government's target is very small businesses indeed, as the average operation affected by the move would have only a handful of employees.

An executive with a small media company in north China's Gansu province said the revenue threshold is extremely low and likely to limit the impact of the tax measures.

"It's really symbolic," said the executive. "I believe there is no manufacturing company in China that will benefit from the policy."

Other business executives generally agreed the effects would be limited.

"These measures are aimed at very small businesses, or businesses that have just been set up," said Florence Mo, a manager at Lamkin Golf Products, a manufacturer in the southern city of Guangzhou. With about 500 workers, Lamkin is too large to benefit from the tax cut.

The tax cut will add up to some 36 billion yuan per year, or 0.3% of fiscal revenue, HSBC estimates. But the bank's economists argue the revenue is worth sacrificing because the tax cut will produce political benefits, helping to "maintain social stability and uphold consumer spending."

The measure could boost employment and shore up confidence, said Lu Ting, chief China economist at Bank of America Merrill Lynch.

China's policy makers are debating how best to prop up an economy that grew by 7.8% in 2012, its slowest pace in more than a decade, and looks set to decelerate further this year.

A program to replace the business tax with a lighter value-added tax is also intended to benefit businesses. The change has lowered the tax burden on more than 95% of taxpayers in the regions that have made the switch so far, according to the State Administration of Taxation. The agency estimates the change lowered the overall tax burden in those areas by some 23 billion yuan in the first five months of the year.

The State Council on Wednesday also unveiled a batch of measures to support exporters, including simplifying customs procedures and suspending some fees. The government hinted too that it will resist further appreciation of China's currency, saying it wants to maintain a "basically stable" exchange rate.

Tax breaks, targeted lending support and supply-side measures like cutting red tape offer the government a way to give the economy a helping hand without resorting to the all-out stimulus it used to get through the financial crisis, and again, on a smaller scale, to weather a slowdown in 2012.

"The planned changes will definitely contribute to speed and will reduce cost" when clearing shipments at customs, said Jasper Schouten, a manager at International Flavors & Fragrances, a U.S. maker of ingredients for food and other products with operations in China. But he added that the fee cuts would not be a game-changer unless made permanent. "Temporary changes are nice but will have limited impact," he said.

?Yajun Zhang contributed to this article.

Source: http://online.wsj.com/article/SB10001424127887324564704578629414042494522.html?mod=asia_home

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