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Lifeline thrown to Shanghai's small business sector
SMALLER businesses, which employ 55 percent of Shanghai's workforce but suffer the toughest access to capital, are getting a shot in the arm from the city government with 2-billion-yuan (US$316 million) top-up in an investment pool. The city created the fund about six months ago to help smaller, mostly privately owned businesses grow and thrive amid the nation's economic slowdown. The initial investment was 3 billion yuan.
After the latest replenishment made earlier this month, Shanghai earmarked 1 billion yuan to invest in high-tech small firms that have new ideas but no track record, bright young staff but no hard assets to use as collateral for loans.
Two billion yuan will be used to buy stakes in commercial guarantee companies, up 1 billion yuan from last year to boost the ability of guarantee entities to help small firms get loans from banks.
The last but not the least, the remaining 2 billion yuan will cover bad loans that banks may suffer from lending to high-tech startup firms, up from 1 billion yuan previously. Banks are eligible to claim a subsidy if the bad loan ratio of lending to small business exceeds 3 percent.
Banks prefer to lend to larger, state-owned enterprises. Capital starvation in the small business realm is nothing new, but it is starting to attract more attention as authorities come to realize they need to do more to nurture the backbone of employment.
Shanghai Mayor Han Zheng said the city's economic slowdown is bottoming out, but the remainder of the year poses challenges for the city to meet its annual growth target of 8 percent. In the first quarter, the city's GDP grew 7 percent.
The city is trying to reform its economy, and part of its strategy rests on industrial and technological innovation. That's where startup companies shine.
The latest help for small business doesn't surprise me. It comes amid mounting talk about the economic slowdown in China and worries about a chain reaction from the eurozone debt crisis. Small firms not owned by the government often don't have capital reserves to cushion the blow and much less money to expand and develop bright ideas.
With the new injection of capital, Shanghai is sending a clear message to small business: You don't stand alone. For instance, Shanghai Huijin Financing Guaranty Co has helped small firms to access more than 1 billion yuan of loans from banks this year.
The city had about 346,200 small businesses at the end of 2011, comprising 97 percent of all businesses in the city.
The focus on nurturing startups is not limited to Shanghai or even China.
Take the provincial government of Ontario in Canada, which is trying to reduce its economic reliance on traditional industries like timber, minerals and energy. During a trip to Toronto in May, I was impressed at how the Ministry of Economic Development and Innovation there wasn't just doling out money, but rather was taking a pro-active approach in helping start-ups in sectors such as information technology and clean energy.
Forums were set up where veteran businessmen could mentor budding entrepreneurs. Help was provided to show them how to prepare quarterly reports, understand tax law, organize management and, in short, operate like an established company.
Getting startup entrepreneurs to think big while being small is a valuable lesson that will help them secure bank loans or private equity funding, and possibly prepare for an eventual listing.
Of course, Shanghai is not Ontario. But I do find some similarities in the latest Shanghai announcement about additional funds for small businesses.
The municipal government is starting to beef up services for private entrepreneurs. It has purchased auditing services from about 100 professional accountancy firms to help small businesses get their accounts in the kind of order that impresses bank loan officers. Untidy bookkeeping has often been cited as a main stumbling block to loan access.
Drawing on this more disciplined corporate governance, cleaner and clearer record-keeping and guarantees from government, district authorities, such as technology parks, are being asked to find promising startups and use their weight to recommend them to lenders.
Whether this all makes a difference remains to be seen. But it seems clear that Shanghai is upping the ante in the campaign to help small business thrive and survive in the long term.