Zhao Xijun, a finance professor at Renmin University of China, believes that if the government legalizes underground banks, SMEs could have another legitimate financing channel, offering them more convenient and flexible funding options.

Handfuls of money

Legalizing underground banks is another measure the government is considering to help SMEs cope with the difficulties brought about by the global financial crisis. In recent months, the government has introduced many policies to support SMEs and has directed huge amounts of money to help them.

Data from the Ministry of Finance (MOF) show that this year's central budget contains 3.51 billion yuan ($513.91 million) of special funds for SMEs, an increase of 25 percent from 2007. In addition, the MOF and other ministries and commissions have exempted or reduced several fees charged to SMEs, alleviating some of their financial burdens. The MOF also has drafted the Management Rules on Government Procurement for SMEs, requiring governments at all levels to spend more funds on procuring services and goods from SMEs.

The Central Government encourages SMEs to carry out technological innovation. This year, 1.4 billion yuan ($204.98 million) from the central budget went to SMEs to help them continue innovating, an increase of 27.3 percent over last year. The central budget has also earmarked 300 million yuan ($43.92 million) to help SMEs turn their agro-technology research achievements into practice. Furthermore, the MOF has set up a 1.9-billion-yuan ($278.18 million) special budgetary fund to support the innovation and technological progress of SMEs and set aside 1.2 billion yuan ($175.7 million) to support their international economic cooperation activities.

In addition, the China Association of Small and Medium-Sized Enterprises (CASME) has established an SME venture capital fund with a planned investment of 3 billion yuan ($439.24 million). The fund will invest only in SMEs and is scheduled to start operating by the end of this year.

The central bank is offering great support to SMEs to help them obtain loans. To ease their financing difficulties, the PBC increased the loan limit of national commercial banks by 5 percent and that of local commercial banks by 10 percent in August and specified that the increases had to be reserved for SMEs, agricultural projects or businesses in earthquake-affected areas. The central bank also increased the financing limits for SMEs, raising the maximum amount of collateralized small loans for individuals to 50,000 yuan ($7,300) from 20,000 yuan ($2,900) and those for labor-intensive SMEs to 2 million yuan ($292,800) from 1 million yuan ($146,400).

Local governments also have made supporting SMEs one of their primary tasks. Because financing difficulties restrict the development of SMEs, local governments have adopted various measures to improve the loan guarantee system, set up a system of compensating guarantee risks and established a platform for SME financing. Guangzhou Municipal Government, for instance, has offered 300 billion yuan ($43.92 billion) to support SMEs. Liaoning Provincial Government has helped SMEs by establishing a network of loan guarantee institutions at provincial, city and county levels and encouraging capable institutions to provide guarantees for loans granted to SMEs. Financial institutions at various levels in Liaoning Province have provided financing guarantee services for more than 6,000 SMEs with a total amount of 26 billion yuan ($3.81 billion).

At a press conference held by the Information Office of the State Council on November 27, Zhang Ping, Minister of the National Development and Reform Commission (NDRC), said that the government only has one purpose--helping SMEs get through the financial crisis.

"As a Chinese saying goes, 'As long as the green hills last, there'll always be wood to burn,' so helping SMEs get over the crisis will ensure they have a bright future," he said.

According to figures released by the CASME, there are 4.3 million SMEs in China. Since this year in particular, many labor-intensive SMEs have encountered business difficulties. The global economic downturn has curtailed the growth of China's exports, while the rising costs of labor, the appreciation of the renminbi and price increases for raw materials on the domestic market all have been squeezing the life out of SMEs. Figures from the NDRC show that in the first half, about 67,000 SMEs with annual sales revenue exceeding 5 million yuan ($732,100) had closed down and laid off more than 20 million employees.