Ensuring financial support for micro and small enterprises (MSEs) is a complex challenge, especially so during a crisis. Compared with large enterprises, MSEs have higher credit risks due to thinner capital and weaker liquidity and operating buffers, and are more reliant on bank credit for funding. During a crisis, they tend to be more vulnerable than large enterprises, and yet they often account for the biggest share of jobs. Therefore, crisis situations require strong and effective policy measures to support MSEs and the labor market.

This analytical note aims to make a modest contribution to the thin literature on China’s experience in providing credit support to MSEs, including by enhancing the role of the credit guarantee system. It seeks to examine challenges in MSE financing and the evolving approach that China has been taking to address them. The focus is on the recent experience and policy improvements during the pandemic when the role of the credit guarantee system has been significantly enhanced. The note concludes with some policy suggestions.

Authors: Simon Liu, Suan Yong Foo, Xianguo (Jerry) Huang