As Asia's growth accelerates—based on the region's strong fundamentals, proactive policies and increasing confidence—there continues to be a huge potential for SMEs. In fact, across our international footprint, we see the sector growing by 8-10 percent each year.

SMEs in China

According to Standard Chartered Bank's research report, there are 42 million SMEs (including self-employed individuals) in China, accounting for 99.8 percent of enterprises and 75 percent of urban employment. Their contribution to the economy is immense at 60 percent of GDP, 68 percent of export volume and 50 percent of tax income. They also account for 66 percent of patent applications and 82 percent of new products. But they account for only 16 percent of bank loans.

In recent years, in addition to the effect of the abrupt slowdown in the winter of 2008-09, businesses have faced challenges from new labor and environmental regulations, among others. Also, the appreciation of Chinese currency, the yuan, pressured profit margins for many export-oriented businesses. Even in 2008, before the worst stage of the global crisis was reached, China's SME sector was already under severe pressure. It's estimated that 7.5 percent of SMEs had already gone out of business by the end of 2008.

The world downturn affected China's exporting engine as the United States and European inventory slowdown worked through the global production chain. The government provided support during the crisis by easing credit, encouraging banks to maintain loans to SMEs and directly injecting cash in the market.

The recovery over the last 15 months has finally pushed exports higher than the 2008 spring levels but, following the rebound, growth is likely to slow. Rising wage costs put pressure on businesses with very high labor intensity, and it's not easy for smaller enterprises to move west or relocate to cheaper wage countries.

China's rapid economic growth provides huge opportunities for small businesses but tough competition, the frequent uncertainty around property rights and official rules and regulations also pose major challenges.

According to a recent OECD study, China's SMEs face all of the usual issues of limited access to finance as in other countries, together with additional obstacles, including legal ambiguities concerning property rights, collateral and bankruptcy, the tighter credit standards adopted by local banks as part of financial reforms. The issue of collateral is particularly interesting. One study found that, owing to difficulties with the legal situation, only 4 percent of bank loans in China were collateralized versus 70 percent in the United States, though this issue does not affect only the SME sector.

A study by the Asian Development Bank in 2007 found that overall guarantees for SMEs are underdeveloped in China, with less than 1 percent of SMEs receiving guaranteed loans versus nearly 20 percent in South Korea and Taiwan and nearly 40 percent in Japan.

China's export-oriented SMEs have gone through a tumultuous period, with the collapse and then revival of export orders and major changes to labor regulations.

The government is very focused on the issue, recognizing the key importance of SMEs for growth. There have been a series of initiatives in recent years, and new measures to help were announced on the People's Bank of China website on July 1, 2010, including encouraging firms to borrow against moveable estates, intellectual property rights, equity and export rebates. More broadly, the authorities also aim to expand the stock and bond markets further and allow more banks to set up leasing companies, easing the flow of finance.