The service industry and small businesses in China will benefit from a series of new relief measures ranging from tax exemptions to monetary support from financial institutions. The beneficial policies target some of the industries hardest hit by the COVID-19 pandemic, including catering, retail, and travel. Small businesses are the bedrock of China’s economy and their long-term health and development will therefore be key to ensuring China’s future economic growth.
China’s top economic planner, the National Development and Reform Commission (NDRC), along with several other government departments, has released a raft of measures to shore up support for micro, small, and medium-sized enterprises (MSMEs) in the service industry.
In a document released on February 18, 2022, titled Several Policies on Promoting the Recovery and Development of Service Industries in Difficulty (the “policy list”), the NDRC outlines 43 policy measures to provide fiscal and logistical support for service industry businesses that have been particularly hard hit by the COVID-19 pandemic and related restrictions, in particular catering, retail, and travel (link in Chinese).
The policy list includes the extension of tax reductions and exemptions, fiscal support measures, and help with implementing COVID-10 prevention measures, among many other relief policies.
Both MSMEs and China’s growing service industry are crucial to the country’s economic stability and future growth prospects. It is for this reason the government has been keen to bolster support as uneven post-pandemic recovery continues to impact some of the most vulnerable industries and companies.
In this article, we look at the role of MSMEs and the service industry in China’s economy and provide an overview of the supportive policies that companies can enjoy.
The importance of small businesses for China’s economy
It’s impossible to understate the importance of MSMEs to China’s economy. Private MSMEs are often quoted as having made “56789” contributions to the economy, because they contribute 50 percent of taxes, 60 percent of GDP, 70 percent of technological innovation, 80 percent of employment in urban and rural areas, and make up 90 percent of all companies in the country.
The services industry is also playing an increasingly important role in China’s economic development. Although known around the world as a manufacturing powerhouse, China’s services industry surpassed 50 percent of GDP in 2017, and stood at 53.3 percent in 2021. This is even higher in larger highly industrialized cities, such as Beijing, Shanghai, and Shenzhen, whose service sectors account for 81.6 percent, 73.3 percent, and 62.9 percent of local GDP respectively.
China sees the services sector as a key driver for future growth as the country moves away from its reliance on manufacturing. This change is becoming all the more urgent as China’s aging population leads to a shrinking workforce and growing wages for workers leads to rising costs for manufacturing.
But these industries are also some of the ones that have struggled the most during the economic turmoil unleashed by the pandemic. As was pointed out by the Chinese economist Ren Zeping, small businesses in China are the most vulnerable to market volatility and crises, as has been seen most recently by the impact of the COVID-19 pandemic (link in Chinese). Given the nature of COVID-19 lockdowns and travel restrictions, businesses that rely on in-person transactions and the movement of people have been hit the hardest, such as catering, retail, and travel.
Data from a Deloitte report, for instance, shows that 69 percent of catering businesses saw an 80 percent decrease in dine-in customers during the pandemic. According to the report, this drop in dine-in customers was not remedied by an increase in takeout orders, with 32 percent of businesses stating they believed takeout orders had decreased 80 percent and only 15 percent believing takeout orders had increased during the pandemic.
Travel and tourism, naturally, is another sector that has seen a significant impact from the pandemic. According to the Ministry of Culture and Tourism, there were 251 million trips during the 2022 Chinese New Year, China’s busiest travel season, a two percent decrease from 2020, despite a recovery of domestic travel in 2021. Then there is international travel, which has almost ground to a complete halt as more and more inbound flights are suspended and canceled due to the uptick of imported COVID-19 cases. Chinese airlines have consistently reported losses in 2021.
Although many businesses in these industries are mostly out of the woods, post-pandemic recovery has not been straightforward. The imposition of strict COVID-19 prevention measures in response to sporadic outbreaks has continued to impact businesses caught in the crossfire, and uncertainty has led to a drop in consumer confidence and less spending.
In light of these persistent issues, China has put in place several measures for assisting small businesses in pandemic-hit industries. The latest policy list released by the NDRC specifically targets small businesses in China’s catering, retail, and travel industries by issuing a raft of measures, from tax reductions to directives to tech platforms to reduce fees for merchants.
Tax reductions and fiscal support for small businesses in China
The policies provide the extension of several tax reductions for small businesses in China. These include:
- Extending the policy of additional deduction of value-added tax (VAT) in the service industry. In 2022, the deductible input tax of taxpayers in the production and living service industries will continue to be deducted by 10 percent and 15 percent of the taxable amount respectively.
- Extending the applicable scope of the “six taxes and two fees” policy in 2022. This policy, first introduced in 2019 to help ease the tax burden of small-scale VAT taxpayers, allows provincial governments to reduce the “six taxes and two fees” within 50 percent of the tax amount. The “six taxes” are:
- Resource tax
- Urban maintenance and construction tax
- Property tax
- Urban land use tax
- Stamp duty (excluding securities transaction stamp duty)
- Farmland occupation tax
The “two fees” are:
- Education surcharges
- Local education surcharges
This tax benefit was originally applicable between January 1, 2019, to December 31, 2021, and applied only to small-scale VAT taxpayers. The policy has now been extended to 2022 and expanded to include eligible small low-profit enterprises and individual industrial and commercial merchants in the services industry.
- Encouraging all localities to grant taxpayers who have difficulties in paying real estate tax and urban land use tax in 2022, where local regulations and conditions permit.
- Increasing the pre-tax deduction of equipment and appliances for MSMEs.
In addition to tax reductions, the policy list outlines several fiscal measures to support small businesses in China, which include:
- Extending the inclusive insurance policy for unemployment and stable work resumption for companies that do not have layoffs or reduce layoffs and increase the return ratio of MSMEs from 60 percent to a maximum of 90 percent.
- Reducing the rent for MSMEs and individual industrial and commercial merchants located in medium or high-risk COVID-19 areas that rent state-owned property. These businesses can have their rent reduced for a period of six months in 2022. Businesses in other areas can have their rent reduced for three months in 2022. All localities are encouraged to coordinate funding to extend rent support to businesses that rent non-state-owned property.
- Guiding banks to properly allocate the RMB 2.2 trillion (US$348.8 billion) of funds released by the two reductions in the required reserve ratio (RRR) in 2021.
Some background: The RRR is the amount of liquidity banks are required to hold against the amount they lend. The lower the RRR, the more money banks can lend. The People’s Bank of China (PBOC) lowered the RRR twice in 2021, first in July by 0.5 percentage points and again in December by another 0.5 percentage points, which in total frees up around RMB 2.2 trillion (US$348.8 billion) of liquidity. Although the purpose of the cut was not exclusively to provide more funding for MSMEs, this policy directive indicates a cut of the funding is expected to be handed out to small businesses.
- Provide incentive funds for 1 percent of the incremental balance of inclusive small and microloans to local corporate banks, properly allocate the rolling RMB 400 billion (US$63.4 billion) re-lending quota, and guide financial institutions to increase their
- Lowering the loan prime rate (LPR) and the re-lending interest rate to support agriculture and small businesses. In addition, banks will be supervised and guided to reduce bank account service charges, RMB transfer and remittance fees, and bank card swipe fees to reduce the operating costs for MSMEs.
Relief measures for catering, retail, and travel businesses
Recognizing that service-oriented businesses and their employees are particularly COVID-19 restrictions, the policy list outlines specific measures to mitigate the potential impact. These measures include:
- Encouraging eligible areas to roll out free and periodic COVID-19 testing for employees in catering and retail businesses and provide subsidies and support to enterprises for expenditures related to epidemic prevention and sterilization. Specifically, catering and retail employees are eligible for subsidies of at least 50 percent of their regular nucleic acid tests in 2022.
- Allowing provinces with relatively large cash surpluses in unemployment insurance and work-related injury insurance funds to implement phased payment deferrals for unemployment insurance and work-related injury insurance premiums for catering, retail, and travel enterprises. Eligible catering, retail, and travel enterprises can apply to defer payments with the approval of the government of the place in which they are insured for a period of up to one year. No late payment fees will be charged during the deferment period.
- Encouraging government financing guarantee agencies to provide financing and credit enhancement support for eligible catering and retail MSMEs, fulfilling their legal responsibilities for vicarious liability in a timely manner, and actively helping enterprises affected by the epidemic to .
- Supporting qualified localities to inject capital into government financing guarantee agencies and provide financing guarantee fee subsidies.
Relief measures for catering businesses
To mitigate the effects of COVID-19 prevention and control policies, the list outlines the following measures geared specifically toward catering MSMEs:
- Guiding internet platforms, such as those providing food delivery services, to further lower service fees for merchants and reduce the operating costs of relevant catering companies, and guiding internet platforms to give phased preferential service fees to merchants that are in medium and high-risk COVID-19 areas.
- Encouraging insurance institutions to optimize products and services for catering businesses
- Expanding the coverage of business interruption insurance for losses due to the pandemic, improving the efficiency of claims settlements.
- Improving the degree of protection for catering enterprises. Encouraging qualified places to give premium subsidies.
- Encouraging insurance agencies to optimize products and services, expand the coverage of business interruption insurance for losses due to the pandemic, improving the efficiency of claims settlement, and improving the degree of protection for catering enterprises. Encouraging qualified places to give premium subsidies.
Relief measures for tourism businesses
To alleviate the impact of COVID-19 on the tourism and travel industry, the policy list outlines a series of supportive measures, which include the extension of supportive policies implemented at the beginning of the pandemic. The measures include:
- Extending the policy to temporarily refund travel agencies’ service quality deposits in 2022, which was first implemented in 2020. The refund rate will remain at 80 percent for eligible travel agencies. Places that meet certain conditions will be able to further increase the temporary refund rate.
- Encouraging banking and financial institutions to increase the credit supply for the tourism industry.
- Guiding financial institutions to reasonably reduce interest rates for newly issued loans.
- Encouraging qualified tourism businesses to issue corporate credit bonds and expand diversified financing channels for tourism enterprises.
- Increasing inclusive financial support for MSMEs with good development prospects engaged in travel, tourism, performing arts, and other fields.
- Encouraging banking and financial institutions to provide small loans to individual industrial and commercial merchants, such as tourism-related start-ups, MSMEs, and themed homestays.
Relief measures for transport businesses
In 2022, transport businesses can enjoy a range of tax benefits and supportive measures, including:
- One year suspension of the VAT prepayment by railway and civil aviation enterprises.
- VAT exemption for public transport services, such as ferries, public buses, subways, urban light rail, taxis, long-distance passenger transport, and shuttle buses.
- Continuation of central government subsidies for the purchase of eligible new energy buses.
- Local governments can coordinate central-to-local transfer payments and local financial resources to support airlines and airports in implementing COVID-19 prevention and control measures.
- Continuation of central government subsidies for qualified air routes and building security capabilities through the Civil Aviation Development Fund.
- Continuation of subsidies for the operation and building security capabilities of small and medium-sized airports and affiliated airports through the Civil Aviation Development Fund
- Providing discounts for civil aviation infrastructure loans, and providing investment subsidies for the construction of airports and air traffic control projects.
Curbing COVID-19 restrictions
In addition to direct supportive policies for pandemic-hit service industries, the policy list also takes aim at the arbitrary implementation of strict COVID-19 prevention measures by local governments. Among other things, the list bans local governments from implementing lockdowns and travel restrictions without approval from the central government. Specifically, the policy list outlines several “must nots” for local authorities, which include:
- Must not stop people from low-risk areas from returning to their hometowns.
- Must not arbitrarily expand the scope of medium and high-risk areas.
- Must not subject people from low-risk areas to measures such as centralized quarantine without authorization or arbitrarily extend the period of centralized quarantine.
- Must not lock down cities or districts in breach of epidemic prevention regulations or unnecessarily interrupt public transport without approval.
- Must not shut down or extend shutdowns of restaurants, supermarkets, scenic spots, movie theaters, and other service providers without a policy basis.
These policies will hopefully make it easier for people to travel between different regions in China, in particular those living in areas with medium and high-risk areas and help boost domestic travel and consumption.
Long-term support for small businesses in China
China is keenly aware of the large role that MSMEs play in the economic stability of the country. It is also aware of the impact that COVID-19 has had on these companies, and the potential consequences for the country’s future economic growth should full recovery continue to falter.
With China’s zero-COVID policy showing no signs of easing, the government must ensure a stronger safety net for companies, and these policy measures for the service industry mark a significant step in increasing support for MSMEs, but likely won’t be the last.
Not long after the policy list was released, the People’s Bank of China (PBOC) reversed a decision made in October 2021 that would ban business owners from accepting payments through their personal mobile barcodes. In its latest announcement, however, the PBOC changed its stance, stating that business owners could choose to use their own barcode or apply for a new merchant’s barcode, likely due to the outsized negative impact this would have on small businesses in China.
It is highly likely that we will see the roll-out of more supportive measures to increase support for MSMEs in other industries. The government is keen on cultivating new startups, particularly in the fields of technology and telecommunications, as MSMEs are a key driver of innovation and a large source of patent filings
Although it is not explicitly stated in the policy list, it is possible that small and medium-sized foreign invested enterprises (FIEs) in services industries will also be eligible for the supportive measures described above.
Foreign investors and entrepreneurs who wish to learn more about preferential policies for FIEs in China can contact us at [email protected].
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at [email protected].
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