Direct subsidies right anti-outbreak prescription for micro, small firms

An employee of an engine manufacturer works on a production line in Tangshan, Hebei province, in September. (PHOTO PROVIDED TO CHINA DAILY)

To contain the spread of the highly infectious Omicron variant of the novel coronavirus, an increasing number of Chinese cities have taken strict prevention and control measures including implementing phased lockdowns. That has added to the problems of the already struggling micro, small and medium-sized enterprises.

According to the quarterly Online Survey of Micro and Small Enterprises jointly conducted by Peking University and Ant Group Research Institute, the percentage of micro and small enterprises (MSEs) performing below par compared with the previous quarter has increased, and their cash flow has declined over the past three quarters.

More important, the income sup-port policy will be more inclusive than the supply side interventions, because it will allow residents in the affected areas to spend the money on goods and services

The government launched a series of measures to help the MSEs in 2020 after the COVID-19 pandemic broke out, most of them being on the supply side, such as providing loans, waiving or reducing tax, deferring social security contribution of employees, and reducing rent.

Although tax reduction was the most inclusive policy support, it couldn't help many MSEs. Since many MSEs pay little or no tax, or hire full-time employees, tax and social security policy support measures are of little help to them. As a result, many MSEs are still struggling, waiting for more targeted policy support to overcome the headwinds.

Also, as most MSEs do not have collaterals and apply for small loans, it does not make economic sense for the banks to issue them loans. That's why the smaller the business of an MSE, the less financial support it generally gets from government policies. That means the potential of helping MSEs through supply side interventions is limited.

Given the strict prevention and control measures being implemented by local authorities, the government could consider providing more MSEs with direct support on the demand side. Amid lockdowns, the demand for a host of goods and services declines, which poses the biggest challenge for MSEs, particularly for those in the consumer service sector according to the Online Survey of Micro and Small Enterprises and the Enterprise Survey for Innovation and Entrepreneurship in China.

Besides providing direct support for MSEs, such as waiving social security contribution for employees and reducing taxes, the government should consider giving income support to residents, including the owners of MSEs, in areas where localized lockdowns are implemented. For income support will not only help prevent the vulnerable population from slipping back into poverty, but also create pent-up demand for the products and services of MSEs after the virus is contained.

More important, the income support policy will be more inclusive than the supply side interventions, because it will allow residents in the affected areas to spend the money on goods and services. It in turn will benefit a vast number of MSEs, particularly those in the consumer service sector.

According to some experts, such income support could increase the government's fiscal burden, but claims appear exaggerated.

First, the localized lockdowns are temporary, and won't cause lasting damage on the local economies. If the income support program can help maintain consumer demand, and the production or service capacity of MSEs is not affected, life will quickly return to normal after the Omicron variant is contained. But without timely and appropriate government intervention, more and more MSEs could go bankrupt, which in turn would increase the unemployment rate, reduce government revenue and force the authorities to spend more on social welfare in the long run.

Second, by specifying an exit strategy, the program can be phased out after the prevention and control measures are eased or withdrawn. That means the budget cost can be capped.

And third, international experience shows that the risks associated with income support programs are manageable. Many countries have implemented income support programs since the pandemic broke out and they have had rather limited adverse effects on the economy. The most notable adverse effect could be inflation pressure resulting from a combination of rising demand and disruption in the global supply chains. But since China has one of the most developed domestic supply chains in the world, inflation pressure should be more muted in the country compared with other economies.

The author is chair professor of economics at the Guanghua School of Management of Peking University. He leads the quarterly Online Survey of Micro and Small Enterprises and the Enterprise Survey for Innovation and Entrepreneurship in China.

The views don't necessarily reflect those of China Daily.