Covid-19: small and medium-sized enterprises in China

The Covid-19 pandemic has put great pressure on the revenues and operating costs of small and medium-sized enterprises (SMEs) in China, says Lufax Holding.

According to a CIC survey of 1,000 SMEs in December 2022, about 40% of respondents with higher financing needs during the Covid-19 period attributed the increase to lower revenues, and about 30% to higher operating costs.

In Q1 2022, due to the blocking measures adopted by local governments, about 16% of China’s economy in terms of GDP and 11% of its population were directly affected, and the impact further increased to 23% and 20%, respectively, in Q2 2022.

According to the Ministry of Commerce, some 4.6 million business entities were deregistered in the first half of 2022.

Despite the easing of Covid-19 pandemic restrictions over the summer, the percentage of the Chinese economy and population directly affected by the blocking measures remained at 11 and 9%, respectively, in the third quarter.

Also, according to a quarterly report on SMEs published by Peking University’s Enterprise Research Center, the SME revenue recovery ratio, calculated by comparing the operating income of SMEs in a given period against the corresponding period in 2019, reached its lowest point in Q2 2022, at only 24.4%, compared with 28.1% in Q3 2022 and 38.3% in Q2 2021.

Covid-19

Overall, macroeconomic repercussions, such as the periodic Covid-19 outbreaks and the resulting lockouts, as well as the subsequent slower than expected recovery of the economy, have affected the SME business environment.

The SME operating index, an indicator of the overall monthly operations and development of SMEs in China issued by the Economic Daily and the Postal Savings Bank of China, declined from 50.6 in 2019 to 49.1 in 1H2022, reflecting that SMEs have not yet recovered to their pre-pandemic operating level.

As a result of lower revenues and higher operating costs, profit margins continue to shrink and working capital conditions vary across SMEs.

According to a quarterly report on SMEs published by the Peking University Enterprise Research Center, SMEs tend to have low working capital, with only enough working capital for 2.6 months on average at the end of June 2022, and 47.5% of SMEs said they did not have enough working capital to maintain their business operations for more than one month at that time.