Economic shock

Because SMEs provide about 60 percent of the nation's industrial output and more than 70 percent of urban employment in China, economists are concerned that their predicament could cause a shock to the world's second-largest economy.

The survey from the Wenzhou Economic and Trade Commission showed that in the first quarter of this year, one-fourth of the 35 respondent companies in 15 industries said they have suffered losses. Their combined profits in the first quarter decreased by 30 percent to an average 3.1 percent from the same period a year earlier.

In May, the main indicator of manufacturing activity, the Purchasing Managers' Index, decreased to a nine-month low of 52, sparking concerns that the Chinese economy may face the risk of a slowdown. A figure above 50 suggests expansion, whilst one below suggests contraction.

Zhou Dewen, the head of the Wenzhou Association of Small- and Medium-sized Enterprises, says that if the government doesn't ease its policy of monetary tightening, 40 percent of the city's small-scale enterprises may stop production or even go bankrupt as early as the second half of this year.

China must take prompt measures, such as tax cuts, to provide support for small companies, Gu Shengzu says. "(Tax cuts) would be a smarter method of maintaining social stability rather than simply easing monetary policy."

Earlier this month, the China Banking Regulatory Commission (CBRC) announced a series of measures to allow greater access to bank loans for SMEs.

Geoffrey Choi, leader of the banking and capital markets department at Ernst & Young in China, says the CBRC's measures are likely to reduce the financial pressure on small businesses.

"The key is that the favorable policies need to continue for some time. Commercial banks are also required to improve their financial services to these private companies," he says.