【Prof. CHEN Jun, Head of Finance and Accounting Department, provided some policy suggestions from the perspective of cash conversion cycle (CCC)】

According to the data released by the National Bureau of Statistics of China on March 16, from January to February in 2020, the COVID-19 outbreak hit hard on Chinese economy, which is shown by the sharp deterioration of main economic indicators. Specifically, for a year-on-year base, the total value added of the industrial enterprises above designated size was decreased by 13.5%, service industry production index decreased by 13.0%, the total retail sales of social consumer goods decreased by 20.5%, the consumer price index (CPI) went up by 5.3%, and the surveyed urban unemployment rate rocketed to 6.2%. At present, with the fundamental improvement of the epidemic prevention and control situation, the national economic situation begins to stabilize, and the resumption rate of industrial enterprises above designated size exceeds 90%. However, SMEs, which absorb 90% labor force in townships and stand for almost 40 million entities, have a current resumption rate of only less than 60%, well below the expectation. This means that the COVID-19 outbreak is posing a more serious threat on SMEs than the expectation.

Since the outbreak, all government agencies have issued a variety of policies in order to help SMEs overcome the difficulties. These policies focus on tax and fee reduction, credit support, enhanced service, and financial support in related to job maintaining. Tax and fee reduction involves exempting firms from the social insurance payments and lowering value-added tax rate, aiming at reducing the operating costs for SMEs. The objective of credit support is to help firms alleviate the temporary financial distress through deferred principal and interest payment, supporting financial institutions to provide preferential loans to SMEs, and developing trade credits.

The current epidemic prevention and its global spread suggest that SMEs have suffered the greatest hardships, and the difficulties SMEs face are more complicated and severe than expected. Thus far, the resumption rate of industrial enterprises in China has exceeded 90%, but that of SMEs is less than 60% and the rate in tertiary industry is much lower than expected. On March 16, the National Bureau of Statistics of China released Chinas economic data for January and February. It shows that the unemployment rate in February was 6.2%, reaching the highest level since 2000.

Business operation could be regarded as a process of continuous and dynamic cash conversion, which is inseparable to operating activities. Cash conversion cycle (CCC) is a metrics that expresses the time it takes for a company to convert its cash investment into cash flows from sales, which approximately equals the sum of days of production cycle, days of inventory outstanding, days of operating cycle (i.e. days of prepayment and credit selling) minus days of payables outstanding. The shorter the CCC is, the less the capital occupancy will be. Conversely, the longer the CCC is, the higher the advance demand and the higher the probability that enterprises break operation because of major financial distress will be. Taking the perspective of CCC, Prof. CHEN provides the following policy recommendations for SMEs.

1.Actively improve sustainable mechanisms to prevent the epidemic

The current difficulties for SMEs to maintain sustainable operation are epidemic-related risk management and cost expenditure, which are also the factors that prevent SMEs from resumption. For the management and costs related to epidemic prevention, SMEs are in urgent need for the help from the society. Such help includes providing SMEs and their employees with exclusive insurance related to the epidemic, offering epidemic prevention and control services, helping to sort out employees accommodation, and etc.

2.Effectively guarantee and accelerate the smooth flow of goods and supply chain coordination

Time is regarded as costs if we take the perspective of CCC. Therefore, in helping SMEs overcome difficulties, all levels of government agencies must be aware of the time, speed up the flow of information, people and logistics, and actively coordinate the supply chain. Specifically, it is necessary to not only accelerate the registration approval, enhance administrative services and facilitate the information communication but also increase the support for logistics-related enterprises. More importantly, it’s crucial to adopt measures to ensure key enterprises to undertake social responsibility and accelerate the supply chain capital turnover.

3.Actively release and stimulate the market demand

Its usually difficult for financial and taxation supports to directly affect the cash cycle of enterprises, making it hard to substantially improve the enterprises’ operating cash flow. If a firm is not able to generate operating cash flow, it is not going to achieve sustainability by solely relying on the financial support. In the middle and late stages of the epidemic, all levels of government agencies should build on relaxing control and in the meantime restore the confidence of SMEs by stimulating consumption and investment. Specific approaches include releasing the market demand, promoting market opportunities, respecting the price mechanisms, activating market transactions, and so on. That being said, for industries that are most affected by the epidemic (e.g., catering, tourism, and retail industries), the difficulty in stimulating the market demand lies in the balance between epidemic prevention and control and consumer confidence restoration.

4.Increase targeted financial assistance to high leveraged SMEs that are severely affected by the epidemic

The current financial credit support dominated by commercial banks can hardly cover SMEs that are severely affected by the epidemic as well as high-leveraged SMEs that lack collateral and guarantee conditions. It is recommended to establish epidemic relief/guarantee funds for SMEs at the central and local governments. When deciding whom to offer aid/guarantee, the government should consider various factors including the number of employees, the wage level, previous profit and tax remittance, and bankruptcy costs.

5.Properly extend the policy of exemption, reduction, and delay of social insurance payments for SMEs

At present, the policy of exemption of social insurance payments for SMEs will be implemented until the end of June, effectively reducing their burden of wage expenditures. Next, the government should consider the situation of resumption of production of SMEs in various industries, and further consider properly extending the policy of exemption, reduction, and delay of social insurance payments or providing financial subsidy to industries and high-leveraged SMEs that are significantly affected by the epidemic. The social insurance payments are linked to the salary base and thus have significant leverage effects.  The extension of the policy of exemption, reduction, and delay of social insurance payments helps reduce future labor costs, boost expectation of production resumption, and enhance market competitiveness of SMEs.

6.Actively adjust the structure of fiscal expenditures and increase the spending on basic livelihood

We should slant government spending to favor basic livelihood security, which is of great significance to the steady development of SMEs and keeping employment stable. One obvious consequence of the current impact of the epidemic is the widened gap between large enterprises and SMEs. The competitiveness of SMEs declines because their labor costs rise relatively faster. Considering the fact that China’s family education expenditures exceeded 1/3 of the family’s total income, during the epidemic, I recommend the government to consider policies like family education subsidies and tuition reduction since online teaching not only increases household expenditures but also squeezes working time of parents.