Policies should focus on upgrading SMEs, not just emergency relief

Changes in the US banking system have had a largely negative effect on SMEs there. Before the banking reforms of the 1980s and 1990s, about 15,000 small local banks financed SMEs in towns throughout the country. The bankers lived locally and intimately understood the business prospects, and even the character, of local businesses. But, since that time the total number of banks in the US has fallen to about 5,000, which are dominated by 10 huge interstate banks that now hold 90 percent of total deposits. These banks don't have local knowledge to evaluate small business loans. Even worse, they see such loans as unprofitable nuisances and would rather make high interest rate consumer loans. So, it's not surprising that the number of new companies as a percentage of all US businesses has fallen by almost half since 1980.

Wisely, in my opinion, Germany has maintained a system of local banks called sparkasse, whose mission is to support local SMEs. These specialized banks are one key part, along with a vocationally trained workforce, of a system that has allowed German industry to thrive while manufacturing has declined in many other European countries.

China's economy is dominated by a few large banks, but government requirements that they develop the expertise to loan to SMEs can protect the country's entrepreneurial vigor. Developing the infrastructure and experts needed to evaluate small business loans will be challenging for China's banks, but this is essential for the future of the country. Also, there are at least 1,000 smaller county-level banks that will play a key role as lenders to rural SMEs.

SMEs of all sizes are important parts of the Chinese economy. According to the World Economic Forum, "(Private companies) contribute 60 percent of China's GDP, and are responsible for 70 percent of innovation, 80 percent of urban employment and provide 90 percent of new jobs. Private wealth is also responsible for 70 percent of investment and 90 percent of exports."

During a news conference after the close of the session of the National People's Congress, Premier Li expressed strong support for the smallest micro-SMEs－street vendors selling food or small items. Economist Zhou Tianyong estimates that 50 million new jobs could be created by increasing street vending nationwide.

Larger medium-sized businesses are a critical part of China's export sector－often producing specialized export products. As their quality increases, China's medium-sized manufacturing firms will take on a role similar to the famous mittlestand producers of specialized, high-quality products in the German economy.

Especially in services, small businesses make the Chinese retail sector a big employer and are possibly the most efficient and convenient in the world. Retail stores offer opportunities for many young people to get started in the workplace.

And, on the other end of the scale, small start-ups are the primary way that the economy explores new ideas in technology. Entrepreneurs are able to take risks and explore business models that big companies can't implement.

Measures to make SME financing more widely available, provide vocational training to workers and to reduce the tax burden will ensure that China's business climate continues to improve and, most importantly, that SMEs are able to fulfill their crucial role in upgrading China's economy.

The author is a senior staff commentator at China Daily.