China, a Bull Market for Small and Medium Enterprises

October 2, 2007 - By: Lee Anderson, J.D., M.L.S., Staff Analyst

Serious growth is taking place in small and medium enterprises in China and this is no accident. The Chinese government has targeted these enterprises for growth.

Historically small and medium enterprises in China have limited international experience and infrastructure but this is rapidly changing. Traditionally there has been a steep learning curve in finding small and medium size enterprises in good financial health, with limited downside risks and strong strategic options. Western investment bankers are scouring China for new companies as merger and acquisition targets.

Global Financial Firms Actively Searching for Asian Buy Outs

Many global financial firms, concerned that the recent market turmoil will slow deal-making, are considering pulling back on deals and on hiring EXCEPT in China. For these firms recruitment for China is very high – they are beginning the hunt for SME’s in China. If you know what “Ni hao” and “Ebitda” mean, you may be well on your way to landing an investment banking job and find yourself well in the middle of the greatest hunt in the world – SME’s that are on the road to development in China.

Investment bankers HSBC, UBS and Goldman Sachs, are three Western banks that are especially active in China.

Shareholders can participate in this great hunt ... for the best SME’s in China that are traded OTCBB. It is entirely possible to ultimately own a diversified portfolio of rapidly growing Chinese and Indian international companies traded on U.S. stock exchanges.

SME’s Are Where the Action is

Western companies have approached rapidly developing enterprise markets from the top down, particularly the local markets and this market is becoming crowded. The great race and battle now is for the SME’s in China. In the SME world only a small percentage of their competitors are other Western companies. The majority of their competitors are indigenous companies and this represents fertile investment territory. The mid-market is far bigger than the high-end market and accounts for 30% to 50% of total spending in most cases. With China’s rapid growth many local firms that started at the bottom are now capable of competing for mid-market customers and are effectively and aggressively doing so. The infotech, telecom, and numerous industrial sectors are crowded with them.

Local companies build their businesses from the bottom up. Both approaches have worked well. At the top of the pyramid, you find companies that want, value, and can afford Western brands and technology. At the bottom of the pyramid, you find thousands of widely dispersed companies for which the main considerations are usually cost and convenience; if something isn't inexpensive and available locally -- including maintenance and repair services -- it might as well not exist.

SMEs Have Been Officially Urged to Become Frontline Players

The Chinese government is encouraging privately run small and medium sized enterprises (SMEs) to put greater emphasis on technological innovation and play an increasingly important role in China's economic growth in the years to come.

Wang Liming, vice-director of the SME Department under the National Development and Reform Commission, said the nation is actually doing all it can to help SMEs expand at home and abroad.

He believes Chinese SMEs will become a new force driving the future growth of the economy. By the end of last year, more than 42 million SMEs had been registered in China, representing more than 99 percent of the country's total number of enterprises. SMEs contributed more than 60 percent of the country's gross domestic product (GDP) in 2006.

Many heavyweight Chinese companies have developed from SMEs in the past decades, including Haier, Lenovo, Hisense and Huawei. Link here to view activities of the very recent Small and Medium Enterprise Business Fair in China, September 15-18, 2007.

Guangdong, which borders the Hong Kong and Macao special administrative regions, has the largest number of SMEs on the Chinese mainland. Its SMEs have played an increasingly important role in local economic growth in recent years.

By the end of June, Guangdong had registered around 400,000 privately run SMEs with a total investment of more than 500 billion yuan. The province's SMEs currently employ more than 3.8 million people from around the country.

"Chinese SMEs have now entered a new era of fast development," Wang noted.

He urged them to seize every opportunity for further upgrade and to try to increase their presence in both the domestic and international markets.

SMEs are the Beneficiary of Preferential Governmental Policies

These policies involve taxation, land use rights, loans, financing, employment, foreign trade and the expansion of international cooperation.

SMEs on the Chinese mainland will be able to enjoy many more preferential policies for development in the near future.

SMEs from Hong Kong and Macao will enjoy the same policies as their mainland counterparts, he added.

SMEs have been officially encouraged to expand investments in technical innovation to improve the quality of their products, build their own brand names and further raise their competitive capacity.

SME’s have also been officially encouraged to further expand cooperation with their foreign counterparts as well as their investments abroad, actively participate in international competitions and try to increase their presence in the world market.

Chinese government has been ordered at all levels to do their best to help SMEs overcome their difficulties in financing and development.

Last year, the China Banking Regulatory Commission issued a notice urging banks and other financial organizations to revamp their loan policies to SMEs to encourage additional financing.

By the end of June there were 778,641 SMEs application for bank loans.