COVID-19’S IMPACT ON CHINA’S SMALL AND MEDIUM-SIZED BUSINESSES

Xiaobo Zhang
25 Mar 2020

Since the COVID-19 outbreak began in Nov. 2019 in Hubei Province, China, business activity in the world’s second-largest economy has ground to a halt. China’s small and medium enterprises (SMEs), which generate 90% of employment, constitute 80% of exports, and account for 70% of GDP, have been hit particularly hard.

To gauge the impact of COVID-19 on SMEs, in early February, the Enterprise Survey for Innovation and Entrepreneurship in China (ESIEC) team, led by Peking University, did a rapid follow-up survey of 2,349 previously sampled SMEs in seven provinces, which are largely representative at the provincial level and the major industrial level for China as a whole.

The follow-up survey asked about the resumption of production, as well the different challenges enterprises face, including: How long can the firms’ current cash flow sustain the firms’ survival? What are the most important binding constraints facing enterprises? What are the entrepreneurs’ subjective assessments on the economic outlook? We linked the follow-up survey with firms’ background information gathered in our ESIEC 2017-2019, such as export status, firm size, supply chain, share of workers from other provinces, and so on.

SMEs are struggling to survive. Fourteen percent of surveyed firms will be unable to last beyond a month on a cash flow basis, and 50% beyond three months, presenting a dire picture for SME bankruptcies under an extended epidemic scenario.

Eighty percent of surveyed firms had not resumed operations at the time of the survey (Feb. 10), and 40% of them could not determine a timeframe for resumption.

Barriers to business operations vary along the supply chain, with upstream firms mainly affected by labor shortages, while downstream firms face more serious challenges related to supply chains and consumer demand.

There are large heterogeneities across sectors. For instance, export firms suffered more than non-export firms because they tend to employ more migrant workers and their suppliers are highly concentrated. They held more pessimistic views on business prospects than non-exporters. In fact, China’s exports have dropped by 17.4% this year. The slowdown in Chinese exports has huge implications on the stability of the global supply chain.

The resumption of production in the consumer and business service sectors was lower than in the industrial sector. Consumers are afraid of eating out, watching movies in cinemas, and sending children to participate in extracurricular activities. Most business travel was cancelled, and trade fairs have been postponed. Given the lingering fears of consumers and companies, it will take a longer time for the service sector to recover than the manufacturing sector. Given that the service sector’s share of total GDP has increased by more than 10 percentage points since 2003, when the SARS epidemic occurred, the impact of COVID-19 on the Chinese economy is expected to be larger than that of SARS.

In addition to sectoral differences, SMEs in different regions face different bottlenecks obstructing work resumption. For example, despite the relatively limited impact of the outbreak on Gansu Province, its work resumption rate stands at only 16%. Disruptions in logistics is an important factor. The overriding goal of containing the pandemic, which is being carried out with excess alacrity among the lower echelons, is another key factor.

Overall, our survey shows that COVID-19 has landed a heavy blow on Chinese SMEs, with huge differential effects across sectors and regions. Policies aimed at work resumption should consider the characteristics of each industry and avoid a one-size-fits-all approach. The decision-making should be passed to local governments and entrepreneurs, allowing them to address specific problems and seek the most reasonable and viable work resumption solutions.

Given COVID-19 has now spread to many other countries, the findings on its impact on SMEs in China may also be relevant elsewhere if a similar type of lockdown strategy is adopted. Given the larger share of the service sector in total GDP in developed countries, negative impacts are likely to be more pronounced there.

Xiaobo Zhang is a Senior Research Fellow with IFPRI’s Development Strategy and Governance Division. He is also a Chair Professor of Economics at Peking University and a Visiting Fellow with the Center for Global Development and European Institute for Chinese Studies.

Originally posted on IFPRI’s website

Toward Universal Financial Inclusion in China: Models, Challenges, and Global Lessons

18 Apr 2018

Learning from China’s financial inclusion experience over the past 15 years.

This report examines in detail China’s approach to financial inclusion over the past 15 years. It benchmarks China’s progress against peer economies and analyzes key developments and factors in China’s financial inclusion experience.

The report also outlines remaining challenges to achieving further advances in financial inclusion in China, and distills key lessons for policymakers in other countries to develop and refine their own pathways toward sustainable and long-term financial inclusion.

This was originally posted on the Microfinance Gateway.

Digital Financial Services: Challenges and Opportunities for Emerging Market Banks

25 Sep 2017

The digital transformation that has upended industries from retail and media to transport and business-to-business commerce is now sweeping the financial services industry, through the wide dissemination of digital financial services. This was inevitable, as ubiquitous computing power, pervasive connectivity, mass data storage, and advanced analytical tools can easily and efficiently be applied to financial services. After all, money was already extensively (though not exclusively) created, used, stored, processed, and delivered electronically.

Immediacy and personalization have become the norm for consumer goods and services. Consumers have rapidly become accustomed to making purchases with a touch of their finger wherever they may be, receiving tailored recommendations, choosing customized products, and enjoying delivery of almost any item directly to their front door. Businesses failing to adapt quickly to these technological developments can fail dramatically, and many have already done so, including Tower Records, Borders Books, Blockbuster Video, and countless travel agents and brick-and-mortar retailers. Consumers’ new
expectations apply to digital financial services as well.

Technology has transformed business-to-business and within business interactions, too, enabling reconfiguration of design, production, marketing, delivery, and service functions through distributed supply chains, freelance design, outsourced manufacturing, and contract warehousing and delivery. These reconfigurations are mediated by online marketplaces and distributors, and assisted by back-end support operations and data analysis that together drive better risk assessment, faster fulfillment and more efficient customer service.

The same types of disruptive market innovations and reconstituted value chains are now emerging in the form of digital financial services. This poses distinct challenges for incumbent providers such as banks, finance companies, microfinance institutions, and insurance companies, as financial technology—or FinTech—innovators enter their markets. Incumbents, too, can benefit from these developments, which will enable them to broaden financial access, introduce new products and services, and serve customers more efficiently by deploying new technologies internally or in partnership with external innovators.