Many of China's small and medium-sized enterprises (SMEs) are teetering on the edge of bankruptcy because of a shortage of capital. But now some relief appears to be on the way.

The National Development and Reform Commission (NDRC), China's top economic planner, is about to establish a special bank to provide faltering businesses with financing guarantees. Wang Jianxiang, Director of the Department of Small and Medium-Sized Enterprises at the NDRC, announced the plan at the second forum for SMEs in Guangdong Province on August 3.

Another potential sign of relief came from the People's Bank of China (PBOC), the central bank. According to a Xinhua News Agency report on August 5, the central bank agreed to raise the 2008 credit quota-the amount of money that banks must set aside for business loans-by 5 percent for nationwide commercial banks and 10 percent for local commercial banks to provide some relief to SMEs. This increase means that 200 billion yuan ($29.4 billion) will be added to the original amount of 3.63 trillion yuan ($533.8 billion) of loans for SMEs announced at the beginning of this year.

Furthermore, the State Administration of Taxation is considering raising the annual enterprise income tax threshold for SMEs from 300,000 yuan to 500,000 yuan ($44,100-73,500) to ease their tax burdens.

"Financing is the foremost problem that all SMEs are facing now," Wang said at the forum. "Finding solutions to this problem should be part of the work routine of related departments."

Aches and pains

In May, the China Association of Small and Medium Enterprises started a campaign to diagnose the problems of SMEs in Beijing and Shandong, Jiangsu, Zhejiang and Guangdong provinces. It found that 60 percent of the SMEs in Shandong suffered from capital shortage owing to increasing difficulties in financing. This rate was 70 percent in Zhejiang Province. Although the campaign is scheduled to end in October, Sun Xiuchun, the association's Secretary General, told Beijing Review that more than half of SMEs nationwide would feel the pinch of financing difficulties.

SMEs are a major source of employment in China, with many having an annual revenue of more than 5 million yuan ($735,300). But about 67,000 enterprises of that size shut down in the first half of this year, said Wang.

The financing problems of SMEs became especially obvious this year because of the government's tightened monetary policy, said Chen Naixing, Director of the SME Research Center at the Chinese Academy of Social Sciences. While the government has continued tightening its monetary policy, it has also reduced credit quotas for commercial banks in order to curb inflation during the last two years. This has made it even more difficult for SMEs to secure bank loans.

In the first quarter of this year, commercial banks nationwide extended more than 2.2 trillion yuan ($323.5 billion) in loans, of which only 300 billion yuan ($44 billion) went to SMEs. This amount was 30 billion yuan ($4.4 billion) less than the same period last year and accounted for only 15 percent of the total commercial loans granted, according to statistics from the China Banking Regulatory Commission.

Banks are reluctant to grant loans to SMEs because of the high operational costs and risks involved, said Chen. They also lack effective ways to assess or control risk, he added.

Nevertheless, SMEs have contributed remarkably to China's economic growth, supplying 60 percent of the country's GDP and 50 percent of its tax revenue last year, Chen said. SMEs also provided more than 75 percent of employment in urban areas.