Money not a panacea for small business problems

The financing problems facing small and medium-sized enterprises (SMEs) are becoming old hat for the country's market watchers, and despite several government calls to encourage banks to lend to these companies, there still seems to be no end in sight for the credit squeeze.

In an effort to help these companies in a more direct way though, the government recently announced that the special fund, which was established in 2006 to support the development of SMEs, will increase this year from 12.87 billion yuan ($2.02 billion) to 14.17 billion yuan, according to a report issued by the State Council.

But throwing money - in the form of direct subsidies and discounted loans - may do little more than create unfair competition in the market.

It is clear that not every SME can get a slice of government funding, just as it's obvious that companies that receive help will be more likely to survive. In a sense, the government is shaking up the business landscape in China by stacking the deck in favor of certain SMEs and not others, a move which violates the basic principles of the market economy.

Moreover, government intervention will, in most cases, not produce the effect many are hoping for. Although the government's goal may be to lend a hand to competitive SMEs that might have fallen on hard financial times temporarily, in practice it will be nearly impossible for the government to distinguish businesses with strong potential from moribund companies that should be weeded from the market.

As I understand the issue, the government also looks more favorably on SMEs in certain sectors and geographic locations than others when it comes to divvying out subsidies. This year, the Ministry of Industry and Information Technology and the Ministry of Finance have both said they will give SMEs in western China, as well as those engaged in the biotechnology and new materials industries, funding priority. But who can guarantee that these leanings might not cause many deserving fund recipients to slip through the cracks?

What's worse, rent-seeking behaviors may occur when distributing subsidies. Some SMEs may be able to give themselves an unfair leg up on the competition through bribery or personal connections. This could derail the government's aim by pushing worthy SMEs into dead ends and diminishing entrepreneurial sentiment.

Ultimately, it is the market that should decide which companies are capable of success. Rather than tampering with the market in the name of development, the government would be better off lowering the tax burdens of SMEs, which would not only cut down on their financial burdens, but do so in a way that is fair.