China’s SMEs Continue To Struggle

ChinaofficialPMI.jpgBy John Richardson

ONE of the reasons why China’s polyethylene (PE) demand growth has been below the increase in overall GDP for most of the years since 2006 has been the relatively weak performance of the country’s small and medium-sized enterprises (SMEs). As the state has advanced, the private sector has retreated because most of the benefits of economic growth have ended up in the hands of the better-financed and better politically connected state-owned enterprises (SOE).

A key task of China’s new leaders is to reverse this trend, as the SMEs are a crucial driver of innovation. They must play a bigger role in the economy if China is to escape the middle-income trap. They also account for the bulk of employment and make up most of China’s chemicals and polymer buyers.

And so it is worrying that the official Purchasing Managers’ (PMI) index for smaller companies fell to 47.3% from 47.6% in May. The overall index rose to 50.8% from 50.6%, but this should not necessarily be taken as good news because it could well be evidence of further misallocation of capital. The overfunded and inefficient SOEs, which are responsible for much of the overcapacity across many industries in China, are the main cause of the country’s bad-debt crisis and so need to play a smaller, not greater, role in the economy.

The May index supports the view that China’s leaders face a long and hard battle against the “vested interests” who want to maintain the current economic system. If President Xi Jinping and Prime Minister Li Zeqiang fail, so will China’s economy.

The final HSBC/Markit Economics PMI for May offers further evidence that the SMEs are struggling. A preliminary reading for May, released last month, was 49.6, but the final reading has been revised-down to 49.2. The HSBC/Markit index primarily measures SMEs.

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