China’s key small manufacturing, service businesses under pressure from rising costs despite overall economic recovery

Frank Tang
·4-min read

China’s small businesses, a key priority for Beijing in the post-coronavirus recovery given they employ some 200 million people, are feeling the pain of rising raw material, utility, labour and rent costs, according to a new survey.

Small businesses were offered tax exemptions, inclusive loan coverage and rent cuts to help insulate them from the impact of the coronavirus, but are already under pressure from a slow recovery in revenues and cash flow constraints.

And while China’s overall economy is predicted to grow by 8.4 per cent this year, according to the International Monetary Fund, 59.7 per cent of small manufacturers told a survey by Peking University and the Ant Group Research Institute that rising costs of raw materials, utility bills and labour has surpassed market demand to become their major concern in the first quarter.

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Of small service providers surveyed, 56.2 per cent said rent was the main concern in the results of the survey which was released on Tuesday having analysed responses from 10,923 businesses who employed an average of 5.9 workers.

Cost escalation and weak demand remain the two key challenges facing micro and small enterprises and self-employed businesses

Peking University andAnt Group Research Institute survey

Inflation is now a global issue given the massive liquidity injected by the US Federal Reserve and other major central banks to shore up coronavirus-hit economies, although broad consumer price pressures have yet to show up in China.

China’s inflation data for March will be released on Friday, with the official consumer price index expected to rise slightly to 0.3 per cent from a year earlier, up from minus 0.2 per cent in February. The producer price index (PPI), which reflects the prices that factories charge wholesalers for their products, is also expected to rise to 3.6 per cent from 1.7 per cent in February.

“Cost escalation and weak demand remain the two key challenges facing micro and small enterprises and self-employed businesses,” said the report, which was led by Peking University professor Zhang Xiaobo.

“The operational status of micro and small enterprises has significantly improved, but they still face serious cash flow constraints.”

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The quarterly survey was launched last year to measure the impact of the coronavirus, and the latest results showed that small businesses held cash that could support their operations for 2.6 months on average in the first quarter, slightly lower than the 2.7 months in the fourth quarter of last year and 2.9 months a quarter earlier.

Small businesses with cash to survive for less than one month, though, rose to 30 per cent from 27.2 per cent in the previous quarter, with the survey suggesting self-employed businesses were under the most pressure from cash flow problems due to rising operational costs and a difficulty in obtaining financing.

First quarter revenues of surveyed businesses had recovered to 43.8 per cent of their 2019 levels, higher than 34.8 per cent recorded in the previous quarter, while profit margins improved to an average of 2.3 per cent from 1.5 per cent.

Looking forward, respondents expressed more optimism for orders and revenue in the second quarter with the confidence index for market demand rising to 55.5 from 47 a quarter earlier, while the outlook for revenues climbed to 54.8 from 46.4.

The employment confidence index, which remained in contractionary territory at 49.8, suggested subdued willingness to expand jobs in the next quarter.

A reading above 50 indicates expansion, while a reading below represents contraction. The higher the reading above 50, the faster the pace of expansion within the particular sector or area.

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