As the US Federal Reserve hikes interest rates, many developing countries may see an outflow of funds, currency devaluation, rise of currency prices, increase of interest rates and even falling asset prices.

Although China is not facing pressing problems, it may still bear the pressure of tightening liquidity if the Fed continues to hike interest rates. As the leverage ratio of enterprises is high, greater attention should be paid to the cash shortage of SMEs.

SMEs are facing new problems. Leverage and asset-liability ratios have risen sharply. Before the COVID-19 pandemic, the balance sheets of State-owned enterprises and private enterprises were at similar levels. At the end of 2017, the average asset-liability ratio of SOEs was 60.4 percent, and that of private enterprises was 51.6 percent, with a margin of about 9 percentage points. Since then, the Chinese government has been introducing policies to improve the financing environment for SMEs almost every year.

At the end of 2021, the average asset-liability ratio of SOEs stood at 57.1 percent and that of private enterprises was 57.6 percent, which means that after four years of efforts, the leverage ratio of private enterprises is already higher than that of SOEs. Despite the pandemic in 2020, the loans of SMEs increased by 30 percent thanks to strong policy support. Loans to SMEs grew by 25 percent in 2021, although economic growth was sluggish.

Data suggest that the government's supporting finance policies for SMEs over the past years have proved effective. The leverage ratio of SMEs has increased, and SME financing is increasing by 25 percent to 30 percent annually. However, SMEs that have borrowed money may face a cash crunch. If economic growth slows down and the leverage ratio remains high, enterprises may face pressure in making the repayments on their loans.

The financing costs of private enterprises remain high. Although the leverage ratio of private enterprises is similar to that of SOEs, the former face much higher loan repayment pressure. The average interest rate on a loan for SMEs in China was 5.6 percent last year, and that for large enterprises based on the loan prime rate was 3.8 percent. With the inflation rate deducted, the gap between the two sides is even wider in terms of the real lending rate. Most SMEs are engaged in medium and lower-value manufacturing, with the products sold to consumers at prices that are little more than the production costs. China's consumer price index rose 0.9 percent year-on-year last year. With that deducted from the nominal loan interest rate of 5.6 percent for private enterprises, the real loan interest rate for SMEs is 4.7 percent.

However, large enterprises are often at the higher end of the manufacturing industry value chain. Last year, the loan prime rate was 3.8 percent and the producer price index was 8.1 percent, making the real lending rate for large enterprises－4.3 percent. The financing cost of private enterprises is 1.8 percentage points higher than that of large enterprises when calculated in terms of the nominal loan interest rate, and 9 percentage points higher than the latter under the real loan interest rate.

A survey shows that the payment days of the receivables of SMEs has extended from 30 days to 90 days during the pandemic. By the end of 2020, the total receivables of the SMEs across China reached 14.7 trillion yuan ($2.3 trillion), while loans of SMEs totaled 15.5 trillion yuan that year. More interestingly, according to another survey, many SMEs have experienced defaults on their account receivables, while the payment days of the account receivables of large enterprises have been reduced. For SMEs, as they can't receive receivables in time, they have to borrow money to run their businesses, which not only improves their leverage ratio, but also increases their capital cost and further increase their cash flow risks.

The government needs to further help alleviate the cash crunch of SMEs. China's financial regulatory authorities have been urging financial institutions to reduce the financing costs for SMEs in recent years. Such a policy works during the pandemic, but is unsustainable, because financing costs should ultimately be determined by the market. Enterprises facing high risks are supposed to see high financing costs, otherwise the stable development of financial institutions will be affected. To reduce SMEs' financing costs, eased monetary policies or fiscal discounts should be launched.

The government can shorten the payment period of the receivables for SMEs, and introduce policies for regulating large enterprises that default on their payments to SMEs. Efforts are needed to settle on a reasonable payment period, which can be about 30 days like in the years before the pandemic, launch credit evaluations of large enterprises on their payment to SMEs, and urge large enterprises to involve the payments to SMEs, as an important indicator, in their ESG(environmental, social and governance) evaluating system, and publicize their payment performance records regularly.

Subsidies should be provided for SMEs. During the pandemic, the government encouraged financial institutions to provide loans to SMEs and helped the enterprises tide over difficulties through tax and fee reductions. However, companies applying for loans and benefiting from the measures are SMEs that are operating well. The SMEs facing financial difficulties are less enthusiastic about loans and enjoy few benefits from tax reductions for they pay low amounts in taxes. When providing subsidies to SMEs, the government can also draw references from practices of other countries.

The author is Huang Yiping, deputy dean of the National School of Development at Peking University. The author contributed this article to China Watch, a think tank powered by China Daily.

The views do not necessarily reflect those of China Daily.

Contact the editor at editor@chinawatch.cn

Source: China Daily