China will see faster growth of small and medium enterprises (SMEs) in the western provinces if the government accelerates law reforms, streamlines registration and administrative procedures for SMEs, promotes training and life-long learning, and improves their access to finance, according to a recent World Bank study.

The three biggest issues for SMEs in southwest China, according to the study on Investment Climate for Small and Medium Enterprises in Southwest China, are (1) barriers to business entry and exit; (2) inadequate skills and technology endowments; and (3) poor integration with coastal and export markets. Additional investment climate issues include labor flexibility, access to finance, tax burdens, and efficiency of the courts in resolving commercial disputes. The World Bank undertook this assessment of the investment climate for SMEs in Yunnan, Guizhou and Guangxi at the request of the Office of the Leading Group for Western Region Development of the State Council.

Business registration can be expensive and time consuming. Under China's current company law, RMB 500,000 minimum capital is required to register a manufacturing business as a limited liability company. This represents a high 1237% of per capita GDP. In addition, the registration of new businesses can take twice as long in the Southwest as in coastal China, and businesses in southwest China may be subject to onerous licensing, regulatory, and inspection requirements. Recommendations made in the study include reform of China's Company Law, to reduce registration costs, and streamlining of licensing requirements and inspections.

Continued operations by loss-making state-owned enterprises (SOEs) also hurt local investment climate, for example, by encouraging excessive price competition and absorbing labor and capital in unproductive uses. The study urges accelerated sale of remaining small and medium SOEs to private investors. Further development of social safety nets should be relied on to provide protection to any redundant workers.

In several Southwest cities, firms appear to be below-average in terms of percentages of trained staff and technical staff. Some Southwest provinces also have a shortage of well-trained business professionals and general managers. Government-sponsored business development services, however, are not the answer. Rather, the study suggests development of programs to promote "life-long learning" and to move western provinces, along with all of China, more toward becoming a knowledge economy.

Southwestern producers are poorly integrated with coastal and export markets. Immediate liberalization of entry by domestic and foreign firms into all transport and logistics service sectors would reduce costs and improve service, and thereby address the Southwest's geographical disadvantage. New legislation to allow the organization of cooperative-type farmers associations would make it easier for rural producers to invest in supply chain assets and make it more efficient and profitable to sell food products, cut flowers, traditional medicine, and other rural products in coastal and export markets.

Access to finance is a special problem for SMEs. The study suggests that credit guarantee facilities are not the answer. Rather, the best ways to improve SME lending would be to liberalize interest rates on loans and entry into financial services, pass new market-oriented laws on bankruptcy and collateral, develop registries to permit a broader range of SME assets (e.g., inventory) to serve as collateral, and encourage international best practices among local banks in SME lending. Lastly, the local investment climate would benefit from more transparent, fair, and efficient approaches to tax administration and resolution of commercial disputes.

(China.org.cn December 20, 2004)