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Small Business Economics

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26-03-2021

SMEs’ line of credit under the COVID-19: evidence from China

Authors: Yun Liu, Yifei Zhang, Heyang Fang, Xin Chen

Published in: Small Business Economics | Issue 2/2022

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Abstract

How does the COVID-19 affect SMEs’ financing in emerging markets? In this paper, we investigate the impact of the COVID-induced shock on Chinese SMEs’ line of credit (LOC) using deal-level data. As Hubei province was mostly affected, we employ a difference-in-differences approach with the propensity score matching (PSM-DID) and compare Hubei SMEs’ credit responses before and after the outbreak relative to those of non-Hubei SMEs. Our results suggest that Hubei SMEs’ credit demand reduced significantly compared to that of non-Hubei SMEs, and the adverse effects were more pronounced for the non-state-owned enterprises (non-SOEs) and the SMEs without prior bank relationships. Moreover, we show a negative impact on non-Hubei SMEs having supply chain relationships with Hubei province. Such effects rippled through the supply chain and exerted an intensified strike on the SMEs with Hubei customers. Finally, we find the state-owned banks eased the LOC to Hubei SMEs during the pandemic outbreak.

Plain English Summary Chinese SMEs’ credit demand deteriorated after the COVID-19 outbreak, though supported by the state-owned banks. How does the COVID-19 affect SMEs’ financing in emerging markets? In this paper, we investigate the impact of the COVID-induced shock on Chinese SMEs’ line of credit (LOC) using deal-level data. As Hubei province was mostly affected, our results suggest that Hubei SMEs’ credit demand reduced significantly compared to that of non-Hubei SMEs, and the adverse effects were more pronounced for the non-state-owned enterprises (non-SOEs) and the SMEs without prior bank relationships. Moreover, we show a negative impact on non-Hubei SMEs having supply chain relationships with Hubei province. Such effects rippled through the supply chain and exerted an intensified strike on the SMEs with Hubei customers. Finally, we find the state-owned banks eased the LOC to Hubei SMEs during the pandemic outbreak. According to our study, government COVID-supportive policies should target the SME subgroups such as non-SOEs, firms that heavily rely on supply chain, and those without stable bank relationships.

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Taking China as an example, the GDP shrank by 6.8% in the first quarter of 2020 compared with a year earlier, the fixed assets investment dropped by 25%, and the industrial output dipped by more than 13.5%, according to the latest release by the National Bureau of Statistics of China (NBS).

The Chinese SMEs have grown significantly since the economic reforms in the 1980s. By the end of 2018, SMEs have accounted for more than 60% of China’s GDP, 80% of the urban employment, and 90% of the total numbers of enterprises. Documented by Fernandes (2020), the Chinese SMEs were hit with only 60% operating rate on average even after the resumption of business at the end of February 2020.

We follow the WHO and name the virus COVID-19 in our paper.

This lockdown on transit came in effect from 10 a.m. on January 23, and Wuhan residents were banned from leaving the city until further notice. Daily necessities were provided directly to their homes by volunteers to strengthen the prevention and control at the community level. The Ministry of Transport also ordered that other parts of the country should suspend the passenger traffic into Wuhan by road or by waterway.

Within hours after the lockdown in Wuhan, two other cities in Hubei province, Huanggang and Ezhou, swiftly followed and restricted public transports. On the other day, similar restrictions were enacted in 12 additional prefecture-level cities in Hubei.

By January 30, Beijing, Shanghai, Tianjin, and other seven provinces had suspended road passenger transport. Meanwhile, 16 provinces had restricted inter-provincial passenger transport, and numerous cities in the 28 provinces had suspended or partially suspended urban bus lines.

The SMEs’ Development Index (SMEDI) is a comprehensive technical index, reflecting the overall economic operation of SMEs by surveying 3000 enterprises in eight industries of the national economy and regarding specific industry production and operation conditions.

These “Special Treatment” firms are financially distressed firms defined by the Shanghai and Shenzhen stock exchanges.

Firms could make multiple LOC applications during the sample period. A firm without LOC applications is labeled as 0, i.e., not borrowed, and has zero aggregate credit demand. Multiple loan application records in the before and after period made by the same firm are aggregated accordingly.

The proportion of casualties or infections is the ratio of provinces’ accumulated casualties or infections to that of China, multiplied by 100.

Following Dong and Men (2014), Ertugrul et al. (2017), and Lin et al. (2018), the matching variables include the largest shareholder rate, separation of power, financing demand, revenue growth, size, fixed assets ratio, solvency, return on assets, and earnings per share.

The COVID-19 shock probably hit consumers’ demand, as Hubei SMEs’ sales decreased in the shock period. Appendix Table 10 shows the DID estimation result.

Specifically, we identify a firm as on the Hubei supply chain if it has at least one Hubei firm in its top 5 suppliers or customers.

We define downstream propagation if it affects the supplier of the firm (i.e., the origin is a customer) and upstream propagation if it affects the customer of the firm (i.e., the origin is a supplier).

China’s three policy banks include the Agricultural Development Bank of China (ADBC), China Development Bank (CDB), and the Export-Import Bank of China (EXIM). The six biggest state-owned commercial banks are the Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications (BOCOM), China Construction Bank (CCB), Industrial and Commercial Bank of China (ICBC), and the Postal Savings Bank of China (PSBC).

The proportion of casualties or infections is the ratio of provinces’ accumulated casualties or infections to that of China.

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Title: SMEs’ line of credit under the COVID-19: evidence from China
Authors: Yun Liu
Yifei Zhang
Heyang Fang
Xin Chen
Publication date: 26-03-2021
Publisher: Springer US
Published in: Small Business Economics / Issue 2/2022
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-021-00474-9

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