The state of China's small and micro companies
PKU Professor Zhang Xiaobo shares results of his survey of overlooked but vital and numerous businesses.
The 70th session of the Peking University National School of Development (NSD)'s China Economic Observation Report Meeting, themed "Annual Review and Outlook of China's Economy, " was held on the afternoon of December 7, 2024.
The following is based on the keynote speech by Professor Zhang Xiaobo, Professor at Peking University Guanghua School of Management, Director of the Enterprise Big Data Research Center, and former professor at the NSD.
It was first published in the WeChat blog of the NSD on January 26, 2025.
The term 个体户 (individual industrial and commercial households) appears repeatedly below. It is one distinct form of business in China, just like limited liability companies and partnerships. They are typically tiny individual or family-based firms, like the sort of small shops you would come across the road in a Chinese city.
张晓波：小微实体经济的现状、挑战与激励之策
Zhang Xiaobo: The Current State, Challenges, and Incentive Strategies for Small and Micro Firms in Physical Industries
Why should we pay attention to the group of small and micro businesses ? The main reasons are:
First, small and micro businesses are the capillaries of the national economy, serving many producers and consumers. Nowadays, the emphasis is on “new quality productive forces.” In industrial parks related to the “new quality productive forces,” the dining, accommodation, and takeout services for R&D personnel are all provided by small and micro businesses around the parks. During our investigation, we found that new development zones cannot operate sustainably without supporting service industries around them. This shows that these "capillaries" of small and micro businesses play a significant role in supporting the development of pillar industries.
Second, small and micro businesses are a reservoir of employment, driving employment for about 400 million people, which is crucial for social stability. If calculated based on 2-3 people per family, this means that at least 800 million people's livelihoods depend on the small and micro economy.
Third, small and micro businesses are both producers and consumers. Their operating conditions directly affect market demand.
Therefore, it is very important to deeply understand the survival status and problems of small and micro businesses. However, microdata on this group is exceptionally scarce. At the national level, including the National Bureau of Statistics, more attention is paid to the data of publicly traded companies, and there is less understanding of small and micro businesses.
Survey of Small and Micro Businesses
To fill this gap, we started offline investigations in 2016. During the COVID-19 pandemic, as we could not continue face-to-face interviews with enterprises, we conducted three rounds of telephone surveys beginning in 2020 and co-authored internal reference reports with Professor Fan Baoqun, which received attention. Over time, telephone surveys encountered some difficulties. At this point, the Ant Research Institute approached us and proposed distributing questionnaires to active merchants on the Alipay platform, and we agreed.
Since the third quarter of 2020, we have been cooperating with the Ant Research Institute to distribute questionnaires to about 1 million active merchants on the platform each quarter and provide a reward of 1 yuan for each questionnaire. The response rate to these questionnaires is about 1% to 2%. If the business owner cannot answer, we ask the staff who collect payments to fill out a short questionnaire. So far, we have conducted comparative surveys for 17 quarters for the general population and small and micro businesses. The survey for the last quarter of 2024 also started on December 15.
We collect about ten thousand questionnaires each quarter, and over 17 quarters, we have accumulated more than 200,000 samples. Although the response rate is only 1% to 2% each time, from a time perspective, the sample data shows considerable stability. From the standpoint of time trends, these samples provide us with much valuable information:
Registered 个体户 individual industrial and commercial households account for 40%, unregistered individual industrial and commercial households also account for 40%, and 公司制 corporate enterprises account for about 10%. About 80% of the samples are truly small and micro businesse.
More than 60% of small and micro business owners are from born in the 1980s or 1990s generations.
Small and micro businesses are mainly self-employed or have 1-4 employees, accounting for over 80%.
About 80% of small and micro businesses are concentrated in the service industry, 10% in construction and manufacturing, and nearly 10% in agriculture, forestry, animal husbandry, sideline production, and fishery.
About 80% of small and micro businesses have a high school education or above.
Basic Situation
Through the survey, we found that most small and micro businesses are of the “糊口型” "subsistence" type (making ends meet). In the sample, nearly half (48%-49%) of small and micro businesses have a quarterly income of less than 25,000 yuan ($3,421), which is a very low figure. About 40% of small and micro businesses are not profitable, of which 20% have negative net profits, and another 20% barely break even.
In terms of operating methods, about half of the sample relies entirely on offline operations, 20% operate purely online, and about 30% combine online and offline operations.
Main Findings
Small and Micro Businesses Create Jobs
In all samples, the average number of jobs created by small and micro enterprises is 3.9 people, but the median is only 1 person. About 45.3% of small and micro enterprises have no full-time employees, and 40.8% have 1-4 full-time employees.
About half of the small and micro businesses in the sample are registered individual industrial and commercial households, and the other half are unregistered. At the end of 2023, the number of registered individual industrial and commercial households in China was 124 million. Our in-person survey last summer shows that about 60% of registered individual industrial and commercial households are active. Combining the above data, it can be calculated that individual industrial and commercial households drive employment for about 290 million people (=124 million * 60% * 3.9). Although the number of unregistered individual industrial and commercial households is smaller, when added to registered individual industrial and commercial households, they drive employment for about 400 million people.
Currently, the issue of youth employment is of great concern. In our survey, we also asked the respondents about their age, and the results showed that individual industrial and commercial households create nearly 300 million jobs for young people.
Small and Micro Businesses are Both Entrepreneurs and Consumers
Small and micro businesses are not only producers but also consumers, but this point is often overlooked. Most small and micro businesses are very vulnerable. During the pandemic, our survey questions mainly focused on the quarterly changes in family consumption of small and micro business owners. Comparing the changes in family consumption between small and micro businesses and their employees, we found that in the face of shocks, small and micro business owners often sacrifice family consumption and tighten their belts to ensure employee wages. The decrease in family consumption of employees is smaller than that of these small and micro business owners. This further highlights the vulnerability of small and micro businesses. After the pandemic, the consumption changes of small and micro business owners gradually improved, and the trend of consumption changes was basically the same as that of ordinary employees.
In times of crisis, even if they are in difficulty, small and micro business owners do not easily lay off employees and try their best to pay employees' wages, even at the expense of their own family's consumptionl. Therefore, small and micro businesses can be called stabilizers of society.
The problem of insufficient demand still exists. When discussing insufficient demand, we cannot ignore the role and demand of small and micro business owners. The pandemic has affected the lives of hundreds of millions of families. Small and micro enterprises are operating with difficulty, cash flow is tight, and family consumption has almost exhausted all savings, which is an important reason for the economic downturn and insufficient demand.
Over the past 17 quarters, the net profit margin of small and micro businesses has shown a clear V-shaped trend. In the last quarter before the end of the pandemic, the profit margin fell to negative, indicating that enterprises were generally in trouble. Although there was a rebound in the first quarter afterward, the subsequent recovery process was slower than expected.
The cash flow situation also shows a similar trend. Our survey data shows that the average cash runway for small and micro enterprises in the sample is about 2.9 months. However, this figure hides the vulnerability of many enterprises. About 31% have a cash runway of less than one month, which means that any slight disturbance can lead to the risk of bankruptcy for them. Therefore, although 2.9 months seems to be a relatively stable indicator, the actual situation is far more severe.
Main Pressures on Small and Micro Businesses
Through analysis, we found that the main pressures faced by small and micro businesses include market demand, operating costs, debt repayment pressure, policy uncertainty, and tax and fee burdens.
During the pandemic, due to the disruption of the supply chain, the operating costs of small and micro businesses soared at one point, and the pressure from policy uncertainty was also great. After the pandemic, enterprises' cash flow improved, policy uncertainty eased, and debt repayment pressure was alleviated. At present, market demand is the main pain point, followed by operating costs. In the past two quarters, the tax and fee burden on small and micro businesses has also increased due to the poor financial situation of local governments.
Policy Demands of Small and Micro Businesses
In terms of policy demands, the sample enterprises generally reflected that they lack funds, so they have the strongest demand for financial support and cost reduction. However, from the actual implementation of policies, the coverage rate of tax and financial support policies is about 20%, and even during the pandemic, the peak was only 23%. This shows that even with increased investment and support, the coverage rate of relevant support policies is difficult to exceed 20%.
The main reason is that smaller enterprises often lack collateral and guarantees, making it difficult for them to obtain financial support. Our survey data shows that the smaller the enterprise, the lower the proportion of financial support and policy preferences; the larger the enterprise, the higher the proportion of various policy benefits, especially tax support and financial support policies. This means that even if the government provides funding support and expands policy coverage, only slightly larger small and micro enterprises may benefit, while the smallest enterprises are still difficult to cover. In other words, if relying entirely on fiscal or other financial support policies, the coverage rate will always be biased and difficult to achieve universality.
Financing Channels
The financing channels for small and micro enterprises have also changed significantly. Many people relied on personal credit financing, such as credit cards and personal consumer loans during the pandemic. Recently, applying to traditional banks for operating loans has become the main external financing channel for small and micro businesses, accounting for 19.2%. A deeper analysis of the sample enterprises shows that the main channel for small and micro businesses to obtain offline financing from financial institutions is large state-owned banks, and individual industrial and commercial households are particularly inclined to borrow from banks.
From the perspective of interest rates, in the past, offline interest rates were relatively low, while unregistered individual industrial and commercial households online usually relied on financing from joint-stock banks and small loan companies, so the online cost was relatively high. The situation has improved recently.
In terms of institutional differences, state-owned large banks have low financing costs and low-interest rates, while joint-stock banks have high costs.
Business Environment
In terms of the business environment, arbitrary charges, arbitrary fines, arbitrary apportionment, unfair market access, and unfair regulation and law enforcement are the top three main problems. Additionally, the proportion of government or state-owned enterprises defaulting on payments has shown an upward trend recently.
In the third quarter of 2024, nearly 70% of small and micro businesses had accounts receivable. Among them, 40% of accounts receivable were between one and two times the quarterly operating income, and 14% of accounts receivable were more than two times the quarterly operating income. About 7.6% of small and micro businesses said that accounts receivable were the main source of pressure this quarter. The pressure of accounts receivable on small and micro businesses is closely related to the default on payments by the government and state-owned enterprises. When evaluating the local business environment, among small and micro business owners who expressed dissatisfaction with the government and state-owned enterprises' default on payments, nearly 20% of their accounts receivable were more than two times their quarterly operating income. The corresponding proportion for small and micro businesses who did not report this problem was only 10%. This shows that the default on payments by the government and state-owned enterprises is a widespread and important influencing factor.
Small and Micro Confidence Index
To more specifically understand the confidence of small and micro enterprises, we surveyed small and micro enterprises' expectations for the next quarter from four aspects: market demand, operating income, operating costs, and employee size. We set 50% as the prosperity and decline line, with values above 50% indicating an optimistic attitude and values below 50% indicating a pessimistic expectation.
Since the third quarter of 2023, the overall confidence index of small and micro enterprises has continued to decline, reflecting that the economic recovery after the pandemic was not as good as expected. The distribution time for the small and micro survey questionnaire in the third quarter of 2024 was from September 18 to October 6, and the overall confidence index fell by 0.7 percentage points month-on-month to 49.0% before the Political Bureau meeting (September 26). After the Political Bureau meeting announced a series of incremental policies, the confidence index rebounded significantly to 51.0%, returning to the optimistic range. This shows that appropriate policies can effectively boost the confidence of small and micro enterprises.
As the saying goes, "When the spring river water warms, the duck knows first." Since 2021, as the capillaries of the economy, the confidence index of small and micro enterprises has been highly correlated with the stock market. In some cities, the small and micro confidence index is even highly correlated with the performance changes of local publicly-traded companies, indicating that small and micro enterprises can also fully perceive the temperature of the local economy. Therefore, the small and micro confidence index not only represents the situation of small and micro enterprises but also reflects the overall confidence of society to a certain extent.
In the third quarter of 2024, the small and micro operating cost confidence index increased slightly by 0.7 percentage points month-on-month to 46.4%, but it is still below the prosperity and decline line, reflecting that small and micro business owners' confidence in the easing of cost pressure is still limited, and they are still waiting to see the expansion and hiring of enterprises. Expanding and hiring employees is not an easy task and requires a decision based on the recovery of the real economy. This means the employment situation is difficult to change in the short term, and the employment problem is still serious.
We also surveyed small and micro business owners' expectations for changes in their own operating indicators (such as product prices and wage expenditures). After the Political Bureau meeting, small and micro business owners' expectations for product prices and wage expenditures increased. In terms of macro expectations, compared with before the Political Bureau meeting, small and micro business owners' expectations were slightly more optimistic after the meeting: the expected GDP growth rate increased from 2.6% to 3.0%; although the CPI was still in the deflation zone, it improved from -0.3 to 0.1; the expected growth rate of housing prices also rebounded from -5.2% to -3.9%. These changes reflect a subtle improvement in confidence.
From the time trend of small and micro business owners' expectations for macro indicators, it can also be seen that a series of incremental policies have a boosting effect on economic growth expectations, price change expectations, housing price expectations, and stock market expectations.
At the end of the questionnaire, there is a section called "Small and Micro Have Something to Say." We conducted a sentiment analysis of the content and constructed a sentiment index, which can show both positive and negative words. It can be seen that after the Political Bureau meeting, the sentiment index improved significantly, and positive sentiment prevailed.
Conclusion
The pandemic had a significant impact on small and micro enterprises. Before the end of the pandemic, the operating conditions of small and micro businesses deteriorated for several consecutive quarters. After the pandemic control policies were lifted, the operating conditions of small and micro enterprises first rebounded briefly and then became weak.
Currently, the biggest challenge facing small and micro enterprises is weak market demand. To solve this problem, it is not enough to support small and micro enterprises on the supply side; it is also necessary to stimulate consumption on the demand side. Consumption can improve cash flow, and when consumption improves, the days of small and micro enterprises will naturally get better.
In addition, the lack of fairness and justice in regulation and law enforcement, as well as arbitrary charges, arbitrary fines, and arbitrary apportionment, are becoming the most prominent problems in the business environment of small and micro enterprises.
The introduction of a series of incremental policies has boosted the macro expectations of small and micro businesses. After the Political Bureau meeting on September 26, 2024, small and micro business owners' expectations for inflation were still negative, which means that there is still room for policy to stimulate the economy through fiscal and monetary means. The best way to stimulate the economy is to stimulate demand. Sometimes the government may not know the real needs of the people, so it is better to give the people substantial support directly.
For example, give a monthly subsidy of 100 yuan to rural residents aged 60 and above. Rural residents know their own needs best and will use the money where it is most needed, reducing waste. Rural residents all have subsistence allowance bank cards issued by the Agricultural Bank of China , which are convenient for the management and distribution of subsistence allowances, ensuring the effective use of funds. If the government supports a certain industry, it may lead to waste.
