China’s Suffering Small Businesses Feel Even More Pain

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China's suffering small businesses felt even more pain in December, with high prices, intermittent virus outbreaks, a slowing economy and other factors combining to create the worst conditions since the initial Covid lockdown.

That's according to the purchasing managers of thousands of companies surveyed by the government, who said the current situation for small companies was the worst since February 2020 when China basically shut down to contain Covid-19. They don't expect the situation to improve either, with the expectations index well below the 50 level that means a contraction.

Smaller firms in China have been struggling for years, with rising labor costs, the trade war and then Covid and the ensuing economic turmoil all damaging their fortunes. The dire data released Friday contrasts with the better results for medium and large firms, which both saw stronger expansions compared with November.

Medium, small and micro companies and individual businesses currently face very large difficulties, the State Council said this month, ordering officials to focus on protecting market entities and to increase financial support for these businesses.

China has been talking for years about support for smaller companies and has increasingly emphasized it this year, expanding financial support to help them cope with a slowing economy and soaring input costs. On top of preferential tax policies, the government and central bank have encouraged banks to lend more to those companies at a lower cost.

“The operating pressure of small businesses is increasing rapidly,” according to a statement from the China Federation of Logistics & Purchasing, which helps the statistics bureau conduct the manufacturing purchasing managers' index. “Although governments at all levels have launched a series of relief policies for small businesses, the recovery of small businesses is still not optimistic.”

The difficult economic situation meant that three times as many people closed their small companies permanently this year than those who tried to start new businesses, according to the South China Morning Post. Almost 4.4 million small companies were deregistered in the first 11 months of 2021, data from Tianyancha, which tracks public registrations, showed.

That is more than three times as many as the 1.32 million new small and micro firms that were set up over the same period. In 2020, there were more than 6 million new firms set up, the data showed.

The small enterprise PMI reading was 46.5 in December and averaged 48.6 in 2021, significantly lower than for medium and larger firms. It was below 50 for the whole year except for a short-lived rebound in March and April.

The indexes for production and new orders at small companies both fell by more than three points, dropping further into the contraction zone in December, the data showed. While the overall price pressures for Chinese manufactures eased further in the final month of the year, the prices small companies pay for raw materials are rising but they're selling their products at cheaper prices, according to a breakdown provided by the federation.

China has around 2.4 million small firms and 15.6 million micro businesses as of the end of 2018, accounting for over 98% of the total companies, according to results from the fourth economic census by the statistics bureau.

With assistance from Bloomberg