New Perspectives on Financing for Small and Medium Enterprises

Author: Gao Zhengping / Country: Mainland China
Publisher:
Publish Date: 2004-08-01
Features:
[Book Excerpt:] (II) The Period of Significant Increase in Local State-Owned Industrial and Commercial Enterprises
This period spanned from 1960 to the mid-1970s. As these enterprises were funded and constructed by both the central and local governments, their initial scale was generally large, with some approaching the size of medium and large enterprises. For example, the Outline for Industrial and Transportation Work in 1966 emphasized that "local industry should prioritize agriculture in its development," and actively develop local steel plants, coal mines, power stations, machinery factories, and chemical fertilizer plants—small-scale enterprises. 1970 was the fastest year for the development of local "five small" industrial projects. That year, nearly 300 counties and cities across the country launched the construction of small steel plants; over 20 provinces, municipalities, and autonomous regions established small tractor factories, small power machinery factories, and various small agricultural machinery, tools, and spare parts factories; and 90% of counties built their own agricultural machinery repair and manufacturing plants. According to incomplete statistics, the steel production capacity of local small steel plants in 1970 increased by 1.5 times compared to the previous year, and pig iron production rose by 1.8 times. The production of chemical fertilizers and synthetic ammonia by small chemical fertilizer plants increased by 60% and 70% respectively compared to the previous year. The output of small cement plants and small chemical fertilizer plants accounted for 40% of the national total. At the same time, some textile, sugar refining, daily chemical, small hardware, and small retail enterprises were established in economically underdeveloped provinces and autonomous regions. 1970 marked a major resurgence in the development of local small-scale industrial projects, following the 1958 period. It can be said that through the adjustment of enterprise scales during this period, the overly small scale of China's small and medium-sized enterprises and the lack of large and medium-sized enterprises were fundamentally changed, resulting in a clear distribution of enterprises across various scale levels.
IV. The Period of Systemic Transformation (After 1979)
During the reform and opening-up process since the Third Plenary Session of the Eleventh Central Committee, small and medium-sized enterprises (SMEs) experienced unprecedented growth. Their basic characteristics include:
(1) A shift from a single public ownership system to coexistence of multiple economic components. Taking the total industrial delivery value in 1995 as an example, state-owned industry accounted for 30.9%, collective industry for 42.8%, urban and rural individual industry for 13.2%, and other types of industry for 13.1%.
(2) As the transition from a traditional planned economy to a market economy deepened, China's SMEs gradually became independent, self-reliant, self-disciplined, and self-developing entities in the socialist market economy, just like large enterprises.
(3) Rapid growth in the number of enterprises and total delivery value. Taking industry as an example, in 1995, the number of industrial enterprises above the township level in China was 388.6 million, including 23.0 million large and medium-sized enterprises and 569.1 million SMEs, accounting for 96.11% of the total and generating 49.42% of the total delivery value. Compared to 1982, the number of SMEs increased by 48.5% in 1995.
Notably during this period were the rise of urban collective enterprises and rural township enterprises.
(1) The Rapid Development of Urban Collective Enterprises
In the early years after the Cultural Revolution, under the dual impact of shortages in goods and services and strong employment pressure, China's urban collective enterprises adopted an economic development strategy that prioritized "heavy" over "light" industries, excessively favoring industrial development, especially heavy industry, while neglecting light industry. This exacerbated the problem of an unbalanced industrial structure. While many large enterprises were overstaffed, essential consumer goods industries and service sectors faced labor shortages. Misguided policies, such as restricting non-public ownership and even attempting to eliminate it, as well as indiscriminate "upgrading" of collective enterprises, significantly reduced the proportion of small and medium-sized industrial and service enterprises, which were indispensable to the economy. The backward third industry also narrowed urban employment channels, making the country's capacity to absorb labor too low. Especially since 1978, the return of 17 million "upward-bound youth" to urban areas intensified the employment crisis. Against this backdrop, the government proposed in 1978–1979 the policy of expanding employment opportunities and developing collective enterprises. Labor departments began establishing labor service companies to guide returning youth in setting up collective SMEs. In 1981, the Decision of the Central Committee and the State Council on Expanding Opportunities, Revitalizing the Economy, and Solving Urban Employment Issues stated that both state-owned and collective economies were fundamental forms of socialism and that multiple economic components should coexist. The decision encouraged enterprises, institutions, and organizations with conditions to actively establish labor service enterprises, develop independent and self-reliant collective economies, and assist unemployed youth in finding jobs. Driven by government support, the 1980s saw a surge in collective enterprises across the country. In addition to labor departments organizing labor service enterprises, factories, institutions, military units, schools, and neighborhood offices all established collective enterprises under the guise of labor service enterprises. Encouragingly, some unemployed youth even organized collective enterprises independently. As a result, new urban collective enterprises sprang up like "spring bamboo after rain." The rise of these collective enterprises and the revitalization of existing ones quickly elevated the status of urban SMEs in the 1980s. From 1978 to 1982, urban collective enterprises employed 12.379 million people, and by 1990, the number of urban collective employees had increased from 20.48 million in 1978 to 35.49 million, a 71% rise. The proportion of urban collective employees in total employment also rose from 21.2% in 1978 to 24.1%.
(2) The Rise of Township Enterprises
In June 1987, Comrade Deng Xiaoping enthusiastically praised the "sudden emergence" of township enterprises and their role in "solving 50% of the problem of surplus rural labor." The sudden rise of township enterprises was an objective reality of China's national economic development and aligned with the country's conditions. In the economic development and modernization of agricultural countries, the continuous transfer of agricultural labor to non-agricultural secondary and tertiary industries has become a common trend. However, with China's large population and vast surplus rural labor, existing large cities and emerging cities lacked the infrastructure and capacity to accommodate such a scale of urban migration. The model of agricultural labor migration practiced in developed countries—where farmers faced bankruptcy, displacement, and spontaneous migration to large cities—could not be implemented in China. This objectively required rural labor to rely on their own efforts to open employment opportunities and vigorously develop secondary and tertiary industries in rural small towns. This approach not only avoided the problems of excessive industrial concentration in large cities and their overexpansion but also protected the interests of farmers, allowing them to follow the path of "initial wealth leading to common prosperity" during economic modernization. The recognition and response to the issue of rural-to-urban migration had already drawn the attention of China's leaders in the late 1950s, but no proper solution was found. For example, during the Great Leap Forward, administrative measures led to the establishment of 2.6 million village-run enterprises in 1958, but by 1962, only 45,000 remained, and by 1965, just 12,000 were left. The Third Plenary Session of the Eleventh Central Committee laid the policy and resource foundation for the development of township enterprises. Since 1979, village and team enterprises entered a period of steady development, while the ownership forms of enterprises established by farmers changed: first, the single collective village and team enterprises evolved into township and village collective enterprises; second, some farmers, freed from animal husbandry, established individual enterprises, joint-household enterprises, and private enterprises with hired labor. Under the coexistence of multiple economic components, the pace of farmers establishing enterprises also accelerated. In 1983, the number of village and team enterprises reached 1.346 million, with 32.346 million employees; from 1984 to 1988, the growth rate accelerated further, with an average annual increase of 24.2% in employment and 47.4% in delivery value. By 1988, employment reached 95.45 million, and delivery value reached 700 billion yuan, accounting for more than half of rural social output value, reaching 56%.
From the founding of New China to this point, the development path of China's SMEs remained tortuous. Thus, the evaluation of the role and significance of SMEs in the national economic construction during this period is also complex. Broadly speaking, some SMEs left over from the old society, as mentioned above, played a certain role in the early days of New China, contributing to stabilizing the national economy and social order. However, over time, due to a lack of experience in economic construction and well-known reasons, China adopted some policies in practice that contradicted economic laws, leading to adverse effects. These effects manifested in two aspects: not only did they hinder the healthy development of SMEs but also severely impeded the overall economic development of the country. This can be understood through a comparative analysis of the economic growth rates of countries around the world at that time, especially the rapid development of newly industrialized economies in Asia. This helps us appreciate the losses caused by the lack of reasonable or proper SME development in China and, from another perspective, understand the significant strategic importance of vigorously developing SMEs for the country.