A reality that links macroeconomic policies to street vendors
As I have focused on macroeconomics for the past year, a realization has gradually dawned on me: economic policies can be as sophisticated as they are tricky.
It can be a fascinating and instructive experience to realize that the monetary policy stance announced by the People’s Bank of China, the central bank, can have a direct impact not only on financial institutions such as banks, other types from lenders and relevant departments, but also on ordinary people like street vendors.
“Micro, small and medium-sized enterprises” or MSMEs, a buzzword for business journalists these days, refer to companies with relatively limited revenues and assets. It can even be businesses at street level, for example, a humble old woman’s “shop” on the sidewalk selling socks, umbrellas and hair clips, a mobile fast food xiaotan or stall on an electric tricycle, or at a neighborhood florist.
A large number of Chinese MSMEs are private enterprises operated by individuals or married couples. Last year, a confluence of factors weighed on their growth. Ongoing COVID-19 outbreaks and related disruptions have slowed their recovery and that of the service sector. Worse still, soaring commodity prices have inflated the costs of small businesses downstream of manufacturing.
Their woes were not lost on the central government which was otherwise busy facing a host of challenges on multiple fronts. A number of measures have been announced to help MSMEs not only to survive but also to grow. These included tax cuts and tax payment deferrals as well as targeted monetary policy measures to reduce their financing costs.
Last year, the State Council, China’s cabinet, urged the PBOC to step up lending and rediscounting to support inclusive finance to benefit small businesses. More policies have been rolled out to incentivize lower guarantee fees for financing micro and small enterprises and to encourage banks to issue more unsecured loans.
The most recent measures include the directive from the National Development and Reform Commission in mid-February that offered temporary tax breaks and partial deferral of social insurance contributions for small businesses in the restaurant, retail, tourism and passenger transport. The objective is to promote job stability and the recovery of consumption.
In addition, in the past year, inclusive lending by large commercial banks to micro and small businesses has increased by more than 40%, and overall business financing costs have steadily declined.
My discussions with various experts made me aware of the effectiveness of tax cuts and financing measures, particularly in terms of employment, because small businesses are the main job creators. The COVID-19 pandemic has shaken the profitability of many companies. Under such circumstances, companies usually resort to downsizing to save on costs such as wages. Thus, relief measures can be effective as they give MSMEs the most liquidity.
Xiao Han, founder of a tourism start-up in Beijing, knows something about it. His business has been extremely affected by the tribulations of COVID-19. Now, however, he said he would never underestimate the importance of postponing tax and social insurance payment policies for small businesses in the service sector.
Xiao’s business employs around 30 people. Founded three years ago, its turnover remains low. For a while in 2020, he had virtually no income.
“If China hadn’t launched the MSME policies, I would have been forced to lay off at least a quarter of my employees because I didn’t have enough money to pay for their social insurance,” he said. he declares.
“We were extremely happy that the postponement policies during the resurgence of COVID-19, which greatly affected tourism, came to our rescue.”
Xiao said he was glad to note that small businesses have been well served by the latest government work report, which confirmed that a temporary exemption from value-added tax payments will be granted to small taxpayers. Corporate tax on annual taxable income between 1 million yuan ($158,166) and 3 million yuan will again be halved for micro and small businesses.
Local governments should also adopt effective tax and fee reduction measures according to local conditions and in accordance with the law in order to maintain the scale of tax and fee reductions and maintain the stability of market expectations, according to the report.
“The tax cuts and refunds will help us get through the tough times. We still believe that after the COVID-19 pandemic, the service industry will help support China’s growth under economic modernization,” Xiao said.