Financing Small and Medium

sized Enterprises in China:

Green Growth and GVC Participation
Bo MENG
(IDE-JETRO)
Co-authored with Weiqi TANG (Fudan Univ.)
ADBI-AFDI-CAREC conference, 2-3 Nov. 2016, Shanghai.
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development
Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee
the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.

Participation in GVCs

Made in USA

Made in the World

C IDE-JETRO All rights reserved.

Source: Meng and Miroudot (WTO report, 2011)

Trade in tasks

factoryless goods

Trade in Value-added (TiVA)

The 2nd great unbundlings

Made in the world

Assembled in China, designed in California

Outsourcing

Smile curves
Offshoring

Vertical specialization
Fragmentation production

Intra-firm trade

transfer pricing
3

Hot topic: Global Value Chains (GVCs)

Source: Gereffiy (2016), GVC Training and Workshop held in Beijing, UIBE.

The rise of Global Value Chains:

Policy implications

Value-added,
Job opportunities,
Income,
Firms competitiveness
Climate change
5

SMEs contribution to Chinese economy

About
50% taxation,
60% GDP,
80% urban job opportunities,
75% new products,
65% patents and inventions
at the end of 2012.

How to be involved in GVCs for SMEs

Direct exports (goods and services)
Indirect exports: (provide intermediate goods
and services, e.g. parts and components to
other firms who have been involved in GVCs)
Investment and etc.

Doing business in China:

Financial constrains for SMEs
Due to the relatively high risk profile that SMEs possess, commercial banks and
investors are reluctant to provide financial support. This situation is exacerbated
by uncertainty and information asymmetries, lack of loan guarantee and collateral,
and some ambiguities of property rights and creditors rights in the event of
bankruptcy (Arora, 2009).
Larger SOEs receive over 75% of loans extended by commercial banks (Zhu &
Sanderson, 2009), and account for over 60% of publicly listed businesses on
Chinas stock markets (Zhongguowang, 2012). In 2013, only 23.2% of bank loans
were extended to SMEs (CBRC, 2014). Access to working capital loans is even
more restricted: only 4.7% of short-term loans went to SMEs.
SMEs thus rely on a wide range of alternative sources, including informal finance,
online peer-to-peer (P2P) platforms, registered non-banking financial institutions
(NBFIs), and underground financiers. Even with interest rates of up to 30% with
unofficial credit resources, many SMEs had no other choice for funding.
Most SMEs have to rely on self-financing, including owners capital and corporate
revenues. Such self-financing is often short-term profit orientated and is reluctant
to invest in R&D and engage in innovation activities, which tend to be long-term in
nature. Limited access to financial resources is listed as the second most severe
obstacle to innovation in SMEs in China (Zhu et al., 2012).

Limitations in the existing researches

on SMEs participation in GVCs
Many case studies (business literature): micro
Most studies focus on SMEs themselves rather
than look at the interaction between large
firms and SMEs
Without deep consideration on the pressure
and opportunities coming from climate
change and Chinas financial reform

A Computable General Equilibrium

(CGE) Analysis on SMEs related policies
Demands (P, (A, S)) = Supplies (P, (A, S))
P: prices (endogenous: commodity prices, wage, rent, etc.)
A: parameters (exogenous: preference, tech. coef., etc.)
S: policy shocks (exogenous: tax, subsides, regulation, ect.)

Real situation about regulation and

financial conditions across firms
SCALE
LARGE
SMALL

STATE
SOLE
LSOE
SOSME
SSOE

OWNERSHIP
FOREIGN
FILE
LFIE
FISME
SFIE

PRIVATE
OPLE
LGE
OPSME
SME

Note: the colored firm types are regulated,

while only the darkly colored firm types are
provided with preferential financial conditions.
12

Chinas Input-Output table with firm size

and ownership information
Demand on intermediate products
Foreign-invested
State-owned Enterprises
Other Private Enterprises Domestic
Enterprises
Final
Small and
Small and
Small and
Large
Large
Large
Demand
Medium-sized
Medium-sized
Medium-sized
(SOLE)
(FILE)
(OPLE)
(SOSME)
(FISME)
(OPSME)
Large
SOLESOLE
SOLESOSME
SOLEFILE
SOLEFISME
Z
Z
Z
Z
(SOLE)
State-owned
Small and
Enterprises
Medium-sized ZSOSMESOLE ZSOSMESOSME ZSOSMEFILE ZSOSMEFISME
(SOSME)
Large
FILESOLE
FILESOSME
FILEFILE
FILEFISME
Z
Z
Z
Z
(FILE)
Foreigninvested
Small and
Enterprises Medium-sized ZFISMESOLE ZFISMESOSME ZFISMEFILE ZFISMEFISME
(FISME)
Large
ZOPLESOLE ZOPLESOSME ZOPLEFILE ZOPLEFISME
(OPLE)
Other Private
Small and
Enterprises
Medium-sized ZOPSMESOLE ZOPSMESOSME ZOPSMEFILE ZOPSMEFISME
(OPSME)
SOLE
SOSME
FILE
FISME
Import
M
M
M
M
Value-added
VSOLE
VSOSME
VFILE
VFISME
Total Input

(X

SOLE t

(X

SOSME t

(X

FILE t

(X

FISME t

Z
Z

SOLEOPLE

SOSMEOPLE

FILEOPLE

Z
Z

SOLEOPSME

SOSMEOPSME

FILEOPSME

SOLE

SOSME

FILE

Export

Total
Output

SOLE

SOSME

X
X

FILE

SOLE

SOSME

FILE

ZFISMOPLE

ZFISMEOPSME

FFISME

EFISME

XFISME

ZOPLEOPLE

ZOPLEOPSME

FOPLE

EOPLE

XOPLE

ZOPSMEOPLE ZOPSMEOPSME

FOPSME

EOPSME

XOPSME

OPLE

OPSME

VOPLE

VOPSME

(X

OPLE t

(X

OPSME t

13

Source: Tang et al. (2014)

Promises and challenges about green

growth of Chinese economy
In the 2009 Copenhagen Climate Change Summit, China has
committed to reduce its carbon dioxide emissions per unit of
GDP by 40 to 45 percent from 2005 levels and use non-fossil
fuels for about 15 percent of its energy by 2020.
China has also committed to peak CO2 emissions by 2030 at
the latest, lower the carbon intensity of GDP by 60% to 65%
below 2005 levels by 2030, increase the share of non-fossil
energy carriers of the total primary energy supply to around
20% by that time, and increase its forest stock volume by 4.5
billion cubic metres, compared to 2005 levels.

Much recently, China has promised to cut emissions from its

coal power plants by 60% by 2020 during the world Paris
Climate Conference (COP21).
14

Intensity target setting

15

Our concern
Policies for Chinas green growth and GVC participation
Regulation, Taxation, ETC (Emission Trading System), Green
financial supports, etc
Firms basic strategies:
1)
2)

either adjust their input structure on the producing technology frontier,

or invest in energy technology to shift the frontier.

The choice of each firm is determined by the

heterogeneous substitutability among and input share of
factors, market conditions, profitability, financing costs,
etc. The heterogeneity not only exists among firms in
different industries, but also within a same industry, which
is usually neglected in the existing policy analyses.
16

Scenarios in our CGE model

FINANCIAL
CONDITION
differentiated
equalized

REGULATION COVERAGE
partial
full
ETS_P_D
ETS_F_D
ETS_P_E
ETS_F_E

17

Impacts of financial reform on the production of

domestic final goods and services
Benchmark year
(2010, real data)
100%

100%

90%

90%

80%

80%

70%

70%

60%
50%
40%
30%

23.5%
60.1%
10.4%
27.6%

40%
30%

20%

20%
10%

10%
0%

0%

Other
SMEs
Otherprivate
private
SMEs

60%
50%

Simulation result
(medium-run: 10 years)

12.0%
6.1%
29.0%
5.9%
6.9%
3.7%9.0%

5.7%
Without
Financial Reform
Direct Exports

27.7%
63.4%

13.1%

Other
large
Otherprivate
private
large
firms
firms
Foreign invested
Foreign invested
SMEs

SMEs

23.2%

Foreign invested large

Foreign invested large
firms

firms

13.1%
6.3%
27.0%
5.8%
6.3%
5.1%
3.8%

5.2% Reform
With Financial
Valu-added

State owned SMEs

State owned SMEs

State owned large
firms
State owned large

firms

Impacts of financial reform on exports

Benchmark year
(2010, real data)

Simulation result
(medium-run: 10 years)

100% 100%
90%

90%

80%

80%

70%

70%

60%

60%

50%

50%

40%

40%

30%

30%

20%
10%
0%

20%
10%
0%

23.5%
23.5%
10.4%
10.4%
27.6%
27.6%

Otherprivate
private
SMEs
Other
SMEs

27.7%
27.7%
Otherprivate
private
large
Other
large
firms
firms

13.1%
13.1%

23.2%
23.2%

29.0%
29.0%

27.0%
27.0%

3.7%
3.7%

3.8%
3.8%
5.2%

5.7%
5.7%

5.2%

Without Financial Reform With Financial Reform

Direct Exports
Valu-added
Exports

Foreign
invested
Foreign
invested
SMEs
SMEs
Foreign
invested
large
Foreign
invested
large
firms
firms
State
SMEs
Stateowned
owned
SMEs

State owned large

State owned large
firms
firms

GVC participation
Direct exports v.s. Value-added export
Benchmark year
(2010, real data)

Simulation result
(medium-run: 10 years)

100%

90%

23.5%

80%
70%

27.6%

30%

10%
0%

39.4%

17.6%
19.2%
15.3%

40%

20%

33.7%

10.4%

60%

50%

Other private
SMEs

29.0%

11.4%
9.0%

3.7%

5.7%
Direct Exports

13.1%
Valu-added
Exports

12.3%

10.2%
8.6%

10.3%

Other private
large firms
Foreign invested
SMEs
Foreign invested
large firms
State owned
SMEs
State owned
large firms

Value-added exports
with financial reform

Linkages between large firms and SMEs

(benchmark year: 2010)

Upstream

SOLE

SOSME

FILE

FISME

OPLE

OPSME

SOSME

FILE

FISME

OPLE

OPSME

Downstream

SOLE

6%

4%

24%

28%

Total GDP created by Chinese exports in 2010

11%

27%

Linkages between large firms and SMEs

(medium-run: 10 years)

Upstream

SOLE

SOSME

FILE

FISME

OPLE

OPSME

SOSME

FILE

FISME

OPLE

OPSME

Downstream

SOLE

5%

4%

22%

25%

Total GDP created by Chinese exports in 2010

13%

31%

23

24

Resource misallocation
With financial reform v.s. without financial reform
SOLE

SOSME

FILE

FISME

OPLE

OPSME

SOLE

SOSME

FILE

FISME

OPLE

OPSME

Green
Invest.

Efficiency index: green investment per unit energy input

25

Summary
Equalized (fair) financial treatment across firms can help
SMEs investment efficiency in the long-run, thus can improve
their competitiveness in both domestic and global markets
(compete with state-owned and foreign invested firms).

Financial reform can significantly reduce resource

misallocation across firms and carbon leakages across
industries.
SMEs can join GVCs through various channels; indirect
channels through providing more competitive intermediate
goods and services to other firms who have been involved in
GVCs (e.g. exporting firms) are also important (maybe much
easier for SMSs to join the domestic segments of GVCs).

Thank you!

Contact: bo_meng@ide.go.jp
27

28

29

Flows of intermediate goods and services across firms in China (2010)

Destination

SOLE

SOLE
SOSME

FILE
FISME
OPLE
OPSME
Origin

SOSME

FILE

FISME

OPLE

OPSME