Small business growth in China is not so different from that of their U.S. counterparts. In order to grow, they both need financing. This is almost always at the top of the list of problems bothering American entrepreneurs, albeit pushed aside temporarily by their inability to find skilled labor.
China, on the other hand, is attempting to be proactive with providing funding for small business growth. Whether the decline in value of the yuan is purposeful or not, the effect of increasing sales and revenue growth is not being moved by it. As such, the government financial committee led by Vice Premier Liu He has ordered China’s banks to lend more to small business as Beijing tries to head off growing risks to jobs and growth from a trade war with Washington.
Macroeconomic indicators from Chinese manufacturers are showing signs of slower growth prior to the potential U.S. tariffs. The latest purchasing managers’ survey published by Caixin magazine this week showed that growth in the service sector, which contributed about 60 percent of China’s economic growth last year, slowed further in July. The outlook for the economy among Chinese managers fell to its lowest level in almost three years. Economists are concerned that the world’s second largest economy will not sustain its domestic growth in the coming quarters.
Hong Hao, chief strategist at Bocom International, the investment banking unit of Bank of Communications said, “Small and medium-sized enterprises always find it difficult to get hold of funds,” and a “targeted” monetary policy may not fundamentally change that problem. As with the U.S. central bank, Chinese bank leaders are hard pressed to believe that a slight shift in monetary policy will quickly find its way down to smaller businesses. Again, like in the U.S., the Chinese financial committee said the main problem was China’s “monetary policy transmission mechanism,” meaning the central bank has pumped enough liquidity into the banking system but the banks are reluctant to lend to small business.
Economists have predicted the economy to slow in the second half of the year due to the effects of the Chinese government campaign to slow down risky lending and excess local government debt. This problem along with the desire to reduce money flow to the property markets could cause inflated prices that could eventually make housing out of reach for the average Chinese worker. U.S. sanctions add to the downward spiral. Steel and aluminum are already beginning to feel the heat, but tariffs that were put in place in June and July, will not start showing deleterious effects until later this year. All the more reason why the Chinese government is stepping in at this time. Whether or not monetary policy can help small businesses is one facet of the economic conversation. The larger picture tosses and turns each week like the waves, as tariff talks from President Trump are leveraged specifically at the Chinese. With the advent of our European allies, this effort to bring China back to a level playing field is well on its way.