Research on the Construction of the multi-level capital market and the Development of small

1
Research on the Construction of the multi-level
capital market and the Development of small
medium-scaled enterprises
A. Professor Chunxu Liu
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Contents

• Part one The Construction of the multi-level
  capital market
• 1. The status of capital market in China
• 2. The intention of multi-level capital market
  system
• 3. The necessities of building up multi-level
  capital market in China
• 4. Comparison between domestic multi-level
  capital market and foreign market
• 5. Prospect of construction of multi-level
  capital market in China
• Part two The development of small
  medium-scaled enterprises
• 1. Definition, position and function of small
  medium
• scaled enterprise
• 2. Difficulties in financing of small and
  medium-scaled
• enterprises and causes analysis
• 3. Countermeasures to financing of small medium
  
• scaled enterprises

3
Status of our capital market

• Shanghai Securities Exchange was established in
  Dec. 1990 and Shenzhen Securities Exchange in
  Jun. 1991
• Special Stock temporary administration in
  Shenzhen on public in Dec 5, 1991. The ceremony
  of contract about Special stock of RMB (B Share)
  underwrite overseas was held in Dec.18 .
• Shanghai Securities Exchange declared The
  Regulation of B Share in dealing and liquidating
  in Jan. 1992.
• Rules for Public on board in Shenzhen Securities
  Exchange was published in Dec.29, 1997, and in
  effect in Jan.1 1998.
• Rules for Public on board in Shenzhen Securities
  Exchange runs in Jan.1 1998. Rules for
  Investment Fund Public on board in Shenzhen
  Securities Exchange was on effect in Mar.17.
• Securities Law of P.R.C went into effect in
  July.1st, 1999.

4
Status of our capital market

• Our capital market were ready to open B Share
  market to domestic investors in Feb.23rd, 2001.
• QFII Qualified Foreign Institution Investors of
  Shenzhen Stock Exchangewas published in Dec.2nd,
  2002
• Special Regulations for Transactions of small
  and medium companies board,Special Regulation
  for listed small-and-medium scaled companies and
  Listing Agreement for small-and-medium scaled
  companies were declared in May.19, 2004.
• Option certificate of stock temporary
  administration was public in July.17,2005.
• Company Law of P.R.C. (revised edition)and
  Securities Law of P.R.C. (revised edition went
  into effect respectively in Jan.1st, 2006.

5
Status of our capital market

• A great changes have taken place in our capital
  market and to the end of 2005, the amount of
  companies listed in Shanghai and Shenzhen has
  reached to 1324 and total market value is 4470
  billion. Meanwhile, conflict appears focused on
  small and medium companies.
• After the issuance of stocks, investors make
  transactions only in two national stock exchange
  which offer services mainly for large scale
  companies .Over 95 companies listed in Shanghai
  and Shenzhen
• Stock exchange ,their total stock price is
  more than 0.4 billion.
• China Securities Regulatory Commission
  allowed establishment of small and medium board
  besides main board in Shenzhen Stock Exchange
  after in May.17, 2004. With the development of
  this special board, domestic capital market will
  supply further service especially to small
  medium scaled companies.

6
Intention of the multi-level capital market

• multi-level capital market means layered market
  structure according to diversified market capital
  demand. It includes
• ? main board also called securities exchange,
  often in a open, well-organized market for
  dealers bid. Mainly for large companies to
  finance through capital market.
• ? second board also called innovative board,
  mainly for small and medium companies and Hi-tech
  enterprises which lies in initial industrialized
  stage to finance. This market often offers such
  service as assess of assets, transaction of
  stock, etc.
• ? OTC market outside the stock exchange, mainly
  for small and medium companies and which lies in
  initial industrialized stage to finance. This
  market often offers such service as assess of
  assets, transaction of stock, etc.

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Hierarchy of enterprise define the hierarchy of
capital market

• It is the common sense that the small medium
  scaled companies need multi-level capital market.
  A solution is establish a OTC market outside the
  exchange or create second board independent from
  main board through lower the list standard.
• It is discussed that multi-level capital market
  in the U.S. has achieved success and we could
  copy the operation. But the fact is we cant.
• The basic mode for securities transaction is
  information asymmetry. The larger the stock
  market, the severer the information asymmetry.
  In order to reduce the transaction cost, we
  should classify securities according to the level
  of risks. As a result, different risk-preference
  investors can choose different risk stocks, this
  can solve the Moral Hazard and converse choice
  based on the theory of information asymmetry

8
Typical modes of second board in global capital
market

• Three typical modes
• ? parallel mode create s single second board, as
  the supplementary portion of main board, both of
  them have the same management organization and
  dealing system, even the same regulatory standard
  and operating parallel, the only difference is
  on board standard.
• ? improved mode create a independent board which
  has a low standard. There is no more regulation
  for listed company besides complete accounting
  system and law consultant guarantee. The second
  board is improved from main board.
• ? independent mode the second board itself has a
  independent transaction system and a single
  regulation system and quotation system. Its low
  criteria offer convenience for emerging hi-tech
  companies.

9
The definition of small medium board

• Small medium board means the total floating
  stock less than 50 million, mainly include
  fast-growing small and medium scaled enterprise,
  which are gathered to public in Shenzhen stock
  exchange as a part of main board in Shenzhen
  stock exchange and need to be regulated
  especially, with present list standard and
  issuance audit rules unchanged.

10
Qualifications on small and medium board

• small medium board can help to develop direct
  finance especially for growing small and medium
  scaled companies and innovative enterprises .Two
  types are allowed
• The first one is growing small medium scaled
  companies. To specifically, the companies have a
  great deal of un-developed resources and
  potential value. In brief, it means this kind of
  small medium scaled company that has the
  ability to exploit potential resources, trend to
  increase and has a perfect future in the long
  run.
• It is fast-growing, energetic, flexibility
  and stability.
• The second one is innovative enterprises, which
  lies in the innovation period in life cycle. It
  often mainly include Hi-tech or emerging
  companies and has a short history, unsteady
  market, uncertainty profit and often greater
  risks.

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The definition of second board

• The second board refers to a new market that
  helps to finance especially for fast-growing
  enterprises, high-tech industries and emerging
  company compared with main board. Listing
  qualification and functions are the same between
  small medium scaled board and second board.

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The differences between the small medium-scaled
enterprise board and GEM

• (l) The entry threshold of the small and
  medium-sized enterprises board is relatively
  high. The listing condition, approach the
  existing main board market, is comparatively
  strict. While the entry threshold on GEM is
  relatively low, the listing condition is
  comparatively loose. (2) Operating the small and
  medium-sized enterprises board adopts non-
  independent subsidiary market mode, which is also
  called one exchange parallel two boards, i.e. the
  small and medium-sized enterprises board
  affiliates Shen Zhen Stock Exchange. As an
  addition to Shenzhen Stock Exchange, the small
  and medium-sized enterprises board operates
  together with Shen Zhen Stock Exchange, and has
  common organization administrative system and
  trade system, and even adopts the same
  supervision standard with Shen Zhen Stock
  Exchange. The difference is only in listed
  standard. Such as Singaporean stock exchange
  Second Board, second board market of Kuala Lumpur
  and Thai stock exchange and Hong Kong GEM and so
  on. And GEM in china will adopt the independent
  operation mode, that is, respectively, Shanghai
  Stock Exchange of GEM and main board market
  operates independently. They have independent
  organization administrative systems and trade
  system, and adopt different listing standards and
  supervision standard, Nasdaq of U.S.A., OTC
  Exchange of Japan, ROSE of Taiwan, China and new
  market of France, they are like that.(3) the
  small and medium-sized enterprises board should
  be prior to GEM. In other words, the small and
  medium-sized enterprises board is embryonic forms
  of the future GEM.

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Why stock market of China is a market of a single
level, and why GEM should be carried out
gradually?

• the Chinese capital market is a new developing
  market, the market mechanism of which is yet
  imperfect, and the regulation system of which is
  not complete yet. There are also many problems on
  structure. Well meet the following questions
• Firstly, the credit foundation of the market
  relies on the government, the mechanism of
  listing and delisting of the listed company is
  immature.
• Secondly, the market lacks steady institutional
  investors, most people engage in speculation.
• Thirdly, the supervision is relatively scarce.
  Especially, to small and medium-sized
  enterprises, we have still lacked the effective
  supervision mechanism.
• In the 1990s, diversified forms of OTC markets
  appeared in China, which produced many problems
  because of lacking primary conditions. In 2000,
  Shenzhen Stock Exchange started the preparatory
  work of the market for the second board. We
  can't deny that many enterprises among them to
  launch management in a down-to-earth manner, but
  there are some enterprises set up for Arbitrage.
  6 years passed, enterprises for arbitrage have
  been already inexistent.

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the necessity of constructing the multi-level
capital market in China

• 1. Help to meet the requirements numerously for
  both sides of supply and demand on the capital
  market
• 2. Help to offer and optimize the access
  mechanism and delisting mechanism, and to improve
  the quality of the listed company
• 3. Help to prevent and avoid financial risks in
  China.

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Help to meet the requirements numerously for both
sides of supply and demand on the capital market

• As to the supplier of funds, because of the
  different risk-preference , investors have
  different levels. Investors would like to invest
  in the risky stock with a high repayment Risk
  neutral will choose to buy moderate risk stock,
  whose benefit is moderate too people who evade
  risk may buy the national debt. However, there is
  only a main board market of the single level in
  China, from the system, it cant offer the
  different risk-partiality investors abundant
  kinds of Investment varieties and different trade
  places.

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Advantageous to satisfies the capital market fund
supply and demand both sides secondary

• From the demand side of the capital, at the
  different stages of development there are
  different sizes, different risk profile of the
  equity financing needs of different enterprises.
  For large-scale, robust type, strength and the
  mature company, because of its relatively long
  history of development, stability, performance,
  operating sound,it is likely to attract a large
  number of investors to buy the stock But for
  small and medium-sized enterprises, particularly
  small and medium enterprises at the start-up
  stage, due to its small size, and its products
  are not mature enough, and great risk, so through
  corporate financing is unrealistic. It is
  affected by many factors. In the dominant
  ideology of the state-owned enterprises.the
  market serving for large enterprises will exclude
  a large number of SMEs.

17
Improve the mechanism of listing and delisting,
enhances the company's quality in stock market

• From the non-securities market to the securities
  market, from the OTC market to the GEM market,
  the main board market, the administration have
  gradually strict standards, the quality of
  enterprises are also stepped up, which actually
  provides a market screening mechanism. On one
  hand, the next level of enterprise cultivated for
  sale on the market will have excellent
  enterprises coming to the fore. So as people on
  the primary market transactions On the other
  hand, for a long time poor management, that do
  not conform to a certain level of standards, the
  listed enterprises through the mechanism of
  withdrawal will draw back to the next level in
  market transactions. This forms a mechanism of
  survival of the fittest, which will help ensure
  the quality of listed companies

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Assisting to avoid financial risk

• Direct financing helps spread the risk, we will
  be able to effectively avoid risks focusing to
  the financial system, thereby reducing financial
  systemic risk. From abroad experience, mainly in
  the financial system of indirect financing,
  serious problems occur in the event of an
  economic entity, then will lead to a large number
  of bank bad debts, the fragility of the financial
  system often drags the sluggish economic
  situation a long time. At present, China's
  financing structure is still mainly relying on
  indirect financing, direct financing ratio is
  still relatively low. It is showed from some
  Information, China's share of equity financing in
  the total amount of capital reduced from 7.5 in
  2001 to 1.6 in the first half year of 2003.
  Meanwhile, the share of bank loans rised from
  75.4 to 89.5.Therefore, a multi-layer capital
  market improve the quality of listed companies to
  meet the diversified investment demand,attract
  funds into the capital market and expand direct
  financing amount, thereby reducing financial
  risks. With the expansion of the scale of
  multi-layer capital market system and improving
  the proportion of direct financing, it will
  gradually form a sub-markets where have
  significant differences in the degree of risk,
  the main risk diversification. That is conducive
  to the stability of financial markets, and will
  decentralized and defuse financial risks.

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comparison of structural characteristic of
Chinese and foreign multi-level capital market
system

• The structural characteristic of American capital
  market system
• The structural characteristic of Japanese capital
  market system
• The structural characteristic of British capital
  market system
• Structural characteristic of Chinese capital
  market system

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The unique feature of US capital market systems

• US capital market system ,which scales the
  biggest and has the most complex and most
  reasonable system, mainly includes three levels
  ? Motherboard market. The motherboard market of
  US stock market is a nationwide negotiable
  securities transaction market which is centered
  by the New York negotiable securities
  transaction. This market has very strict
  standards on listed company, the main performance
  goes on that the market deal with the nationwide
  listed company's stock and bond . The enterprise
  goes on the market in this market generally is
  also well-know, and its company's maturation is
  good, as well as has the good achievement record
  and long history and better repayment. Looked
  from investor's point that, the investor in this
  market is always the risk dodges or the risk
  neutral.

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The unique feature of US capital market systems

• ? The second boards market which takes NASDAQ as
  the core market.The NASDAQ market takes different
  standards on listed companies in contrast to the
  New York stock market. It mainly pays more
  attention to the company's growth and long-term
  profit . The companies in NASDAQ generally have
  the characteristics, eg. high tech content, high
  risk, high repayment, and small scale. Although
  the history of NASDAQ is not long , but its
  development velocity is very high . According to
  the standard of trade volume, it has become
  the second biggest transaction market which is
  just inferior to the New York stock exchange
  market .But from the view of the quantities of
  listed companies and trade volume, market
  performance, fluid ratio, NASDAQ has already
  surpassed the New York stock exchange market.

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The unique feature of US capital market systems

• ?The nationwide market, regional market, and
  outside market The US stock market also is the
  nationwide exchange market, but the listed
  companies in this market are less famous than
  those in New York stock exchange market .The
  companies which has license in US stock market
  are allowed to be given the New York stock
  exchange markets license when these companies
  grows to certain extent .There are 11 regional
  negotiable securities which spread to many places
  nationwide. They mainly distributes in big cities
  which are the national industry and commerce and
  the financial center. They become the regional
  enterprises transaction field, and it may be
  called the US third market (OTC).

23
The structural characteristic of Japanese capital
market system

• The exchange of Japan is also divided into three
  levels Nationwide trade center, regional
  securities trade center and over-the-counter
  market. ?Main board market. Tokyo Stock Exchange
  is the main board market of the Japanese security
  market, having the properties of the national
  central market, the ones that are listed here are
  all famous big companies ?Second board market.
  Another seven exchanges such as Osaka, Nagoya
  form the trade center of the regional securities,
  mainly trading those cards that can't satisfy the
  requirements to list on Tokyo Stock Exchange,
  these seven regional markets form the second
  board market of Japan. ?Over-the-counter market.
  Including shop head security market and shop head
  stock market, the company trading here has small
  scale, but can rise quickly, among them the bond
  trade market on the market of shop head has taken
  the majority of Japan's securities trading

24
The structural characteristic of British capital
market system

• (1)Main board market. London Stock Exchange is a
  nationwide centralized market of Britain, it has
  a history of more than 200 years and is a main
  channel which absorbs the European fund
• (2)Nationwide second board market AIM
  (Alternative Investment Market). Different from
  U.S.A., second board market AIM of Britain is
  sponsored by exchange of London, it is a part of
  the stock exchange of London, belonging to the
  formal market. It runs relatively independent,
  offering a nationwide market to Britain and
  overseas high growth company that is newly
  established
• (3)Nationwide three boards of market OFEX (Of
  Exchange). It is established by JP Jenkins
  Company undertaken to do trader's function of the
  city by securities trading of London, belonging
  to the unofficial market. It is mainly the market
  carrying on the stock financing service for
  medium and small-scale high development
  enterprises

25
The structural characteristic of Chinese capital
market system

• With the market system contrast of the foreign
  capital, the prominent characteristic of Chinese
  capital market system is that the structure of
  market is not complete. Chinese capital market
  develops following the process of the economic
  system reform progressively, also there are some
  profound problems and structural contradictions
  on the thinking of development, mainly as
  follows
• Laying stress on indirect financing, rather than
  the direct financing Laying stress on the bank
  financing, rather than the security market melts
  investment "Laying stress on the stock market,
  rather than the debt market, laying stress on the
  national debt, rather than the enterprise's debt
  " on the capital market. This kind of thinking of
  development has resulted in the structural
  deformity and poor efficiency of allocation and
  use of the whole social fund, seriously
  influencing the effective scattering of the
  market risk and the rational disposition of
  financial resource.

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Structural characteristic of Chinese capital
market system

• (1)The main board market, including Shanghai
  Stock Exchange and Shenzhen Stock Exchange.
  Organizing system, listing standard, trade way
  and structural respect of supervision of the
  securities trading of Shanghai Stock Exchange and
  Shenzhen Stock Exchange are nearly all totally
  identical, mainly offer service of listing for
  the ripe state-run large and medium-sized
  enterprise.
• (2)Second board market (the market for the second
  board on the country's stock). On June 24, 2004,
  the market for the second board on the country's
  stock of serving small and medium-sized
  enterprises especially new high-tech enterprise
  was just put out, it affiliates under Shen Zhen
  Stock Exchange, has basically extended the rule
  of the main board except that can accept and
  circulate one and is listed on small and
  medium-sized enterprises of under 50 million
  shares this point differently, other listing
  conditions and operation rules, nearly like main
  board, so " threshold " listed is still very
  high
• (3)Third board of market (over-the-counter
  market). Including " handling the system of
  transfer of shares on one's behalf " and the
  local trade market of property right. Generally
  speaking, the kerb market of China is mainly
  sponsored by each government department, market
  orientation is indeterminate, the distribution is
  unreasonable, unify the rule scarcely and the
  structural level is single, still remain to
  further develop.

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Prospect of constructing the multi-level capital
market of our country

• 1. Develop the market of exchange, resume pattern
  of competitive market of the exchange, realize
  the modes of dividing one point of the board in
  board on the market of exchange.
• 2. Develop the second board of the market, offer
  convenience of financing for small and
  medium-sized enterprises of scientific and
  technological.
• 3. On the normal basis, lead the market to
  develop the over-the-counter market acting on
  one's own.
• 4. Set up the trade market of many kinds,
  encourage innovations and standardize.

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Prospect of constructing the multi-level capital
market of our country

• 1. Develop the market of exchange, resume pattern
  of competitive market of the exchange, realize
  the modes of dividing one point of the board in
  board on the market of exchange.
• Just as NASTAQ board dividing one point of modes
  of the board, exchange market of China may go on
  the division of the different levels on the
  inside too, for example Shen Zhen Stock Exchange
  has main boards and small and medium-sized
  enterprises board, but the power of this kind
  should autonomies had that proceed from angle of
  market in the exchange. Develop the market of
  exchange still involve several pieces of key
  independent power of exchange, such as the power
  to choose the listed company, set up delisting
  condition, determine the power that enterprises
  quit listing, and design the trade mode and power
  of the innovative trade variety.

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The tentative plan of constructing our country
multi-level capital market

• To develop the starting market and provide the
  convenience for financing channel for mid- and
  small-scale enterprise rich in science and
  technology?
• At present neither small medium-scaled
  enterprise nor the large enterprise has the
  difficulty of going into the stock market,
  complexity of the verification procedure, the
  limit of available capacity. They cannot satisfy
  the multitudinous high-tech enterprise and its
  the venture capital withdrawal need which in the
  state economy high speed growth process produces.
  Through the process of developing an advancement
  board, the key lies in the enterprise and
  investor's demand which is considered during
  condition designation of the release of stocks,
  the entering of the stock market ,and the
  withdraws of capacity. If possible, to study the
  capital market system which is advantageous to
  support independent innovation, such as the city
  business system, the fast way of refinancing
  system, the easy financing channel for mid- and
  small-scale enterprise rich in science and
  technology and so on.

30
Prospect of constructing the multi-level capital
market of our country

• 3, based on the standards, it is needed to guide
  the market independently to develop the
  transaction market outside. From the history of
  development of US'S outside transaction market,
  the place transaction market nearly all is
  independently develops by the market self. For
  example, the NASDAQ market system is formed based
  on more than 3,000 counters transaction in the
  beginning of 1970s, using the electronic
  technology networking. But this more than 3,000
  counters transaction points has already existed
  for a long time the very long time before the
  ASDAQ market period. the question at present is
  that the government has leaded or monopolized the
  entire market right for development, including
  the outside market, this caused the market demand
  not to be able to form the realistic market
  growth. Therefore, we should base on the general
  situation of state economy development, develop
  the outside market in a exploiting way. As for
  the three markets which has already existed and
  the experiment site of Zhongguan Village ,we
  should starts from the point of the enterprise
  and investor's view, speeds up the transformation
  of the market, which help it to become an ordinal
  link in the multi-level capital market .

31
Prospect of constructing the multi-level capital
market of our country

• To establish the multi- type transaction market
  and encourage the innovation and the standard.
• We should suitably introduce and the develop the
  tools derived from the finances and risk-avoid
  tools, like property negotiable securities
  product, ETF, the open fund in the stock market
  (LOF), the power card as well as others. This
  September just licensed the tenable Shanghai
  finance futures exchange was one kind of choice.
  Regarding the development of enterprises debt
  market, there should be more use of the market
  developing pattern.we should change examination
  and approval power primarily giving up eating for
  fear of choking -like development pattern, send
  the creditor's rights to return for the
  enterprise, simultaneously strengthen the credit
  system construction, further strengthen market
  supervising and managing, maintain the market
  order.

32
The development of small and medium-sized
businesses

• From a global perspective, regardless of in
  developed countries or in developing countries,
  small and medium-sized businesses play an
  important roal.
• Judging from Chinese conditions, the statistics
  shows that by the end of 2004, China has over
  3,600,000 registered SMEs and 28,000,000
  individual businesses, which account for 99.6 of
  the total number of enterprises in whole country.
  The ultimate value of goods and services which
  SMEs created accounted for 58.5 of gross
  domestic product, and its industrial output
  accounts 74.7, exports accounting for 68.3,
  imports accounted for 69, tax paid account for
  48.2. Meanwhile, SMEs provide more than 75 of
  the urban employment opportunities.

33
The development of small and medium-sized
businesses

• This shows that small and medium-sized
  enterprises have already become the important
  foundation of economic development, market
  prosperity and employment increase in China. And
  it has become the driving force of change in the
  economic system depends on its flexible operating
  mechanism and its ability to adapt flexibly. It
  has already been the group of Chinese economic
  development which must be paid more attention to.
• However, there are many problems which SMEs must
  be confronted with. One of the most prominent
  problem is the shortage of funds. The development
  of SMEs has been plaguing by its financing
  difficulties and this is a relatively common
  problem faced by all countries. In developed
  countries, informal equity capital markets, risk
  investment system, a second board market, which
  help SMEs make up the financing gap to a large
  extent.

34
The development of small and medium-sized
businesses

• While at present China is in the process of
  changing economic and financial system.
  Faultiness of Micro-operations basis in operation
  of the market economic system caused friction in
  the system made the problem of financing SMEs
  particularly serious. Chinese SME financing has
  phenomena of high cost of financing, financing
  relatively narrow channels, means singleness,
  lack of credit financing. and lack of government
  support. SME financing has already become a the
  bottleneck of stopping SMEs rapid and healthy
  development in China. Discuss how to resolve the
  plight of SMEs financing and build financing
  system which suitable to China's small and
  medium-sized enterprises, which could help promot
  the development of SMEs, thus push forward the
  healthy development of Chinese economy.

35
The classifications of SMEs

• February 19, 2003, State Economic and Trade
  Commission, State Development Planning
  Commission, Ministry of Finance and National
  Bureau of Statistics jointly promulgated the
  "Interim Regulations on Standards for SMEs". The
  criterion is constituted according to the number
  of workers , total assets, and sales targets in
  small and medium-sized enterprises, and combining
  features of various trades. Provisional
  Regulations suitable to industry, construction,
  transport and postal industry, the wholesale and
  retail, and restaurant business.Among them,
  Industry, including mining, manufacturing,
  electricity, gas and water production and supply
  industry. SMEs of other industries witch are not
  include in the standard constitute additionally.
  According to the "Interim Provisions", the
  criteria for the classification of small and
  medium-sized enterprises as following
• (1)Industry, small and medium enterprises must
  meet the following conditions the number of
  workers less than 2000, or sales below 300
  million yuan, or the total assets less than 400
  million yuan. Among them, medium-sized
  enterprises must at the same time meet the
  condition that 300 or above 300 workers, sales
  achieve 30 million yuan or above, and total
  assets is 40 million yuan or above the other for
  small business.

36
The classifications of SMEs

• (2)Architecture trade, small and medium
  enterprises must meet the following conditions
  the number of workers less than 3,000, or sales
  below 300 million yuan, or the total assets less
  than 400 million yuan.Among them, medium-sized
  companies have to satisfy the condition at the
  same time that 600 or above 600 workers, sales
  achieve 30 million yuan or above, and total
  assets is 40 million yuan or above the other for
  small business.
• (3)Wholesale and retail trades, small and
  medium-sized enterprises must comply with the
  following conditions the number of workers less
  than 500 or sales below 150 million yuan Among
  them, medium-sized companies have to satisfy the
  condition at the same time that 100 or avove 100
  workers, or sales achieve 10 million yuan or
  above the other for small business. SMEs in the
  wholesale trade industry must comply with the
  following conditions less than 200 employees,
  or sales is 300 million yuan below. Among them,
  medium-sized companies have to satisfy the
  contion at the same time that 100 or more than
  100 workers, sales is 30 million yuan or more
  than 30 million yuan the other for small
  business.

37
The classifications of SMEs

• (4)Transport and postal trade, small and
  medium-sized enterprises of the transportation
  trade must meet the following conditions with
  less than 30 employees, sales is less than 300
  million yuan. Among them, medium-sized
  enterprises need to meet the condition at the
  same time that more than 500 workers, sales is
  more than 30 million yuanthe other for small
  business. Small and medium-sized enterprises of
  the postal service must meet the following
  conditions less than 1000 workers, or sales is
  less than 300 million yuan. Among them,
  medium-sized companies have to satisfy the
  condition at the same time that 400 or more than
  400 workers, sales is 30 million yuan or more
  than 30 million yuan the other for small
  business.
• (5) Accommodation and catering industry, small
  and medium enterprises must meet the following
  conditions the number of workers below 800, or
  sales below 150 million yuan. Among them,
  medium-sized enterprises have to cater for 400 or
  above 400 workers, and sales achieves 30 million
  yuan or abovethe other for small business.

38
Position and functions of small and medium scaled
companies in China

• (1)lay the solid foundation of socialistic
• market-oriented economy
• (2) fasten economic development
• (3) increase employment
• (4) perfect the ability to avoiding risks
• (5) contribute to economic reform
• (6) improve the incomes of farmers

39
The Importance of financing tosmall and medium
scaled enterprises

• (1)Financing is elementary for normal companies
  operations
• (2) Financing is base and precondition of invest
  from small and medium companies.
• (3) The amount and structure influence the
  performance and profit of enterprises.

40
Characteristics of financing for small and medium
companies

• (1) complex of enterprise structure
• (2) singleness of financing
• (3) weak of credit warrant ability
• (4) information asymmetry
• (5) confused of management structure
• (6) difficult in direct finance

41
Difficulties in financing of small and medium
scaled companies

• (1) scarce of resource for direct finance
• (2) scarce of internal capital
• (3) difficulty in obtaining loan from the bank
• (4) severe structural conflict
• (5) lack of credit guarantee system
• (6) difficulty in direct finance

42
The probable causes for difficulties in financing

• There are two main causes about the situation
  from internal and external. Because of the
  national policies, the loans from four main
  national banks basically were given large
  enterprises or important lines. As a result, the
  loans for small and medium companies are limited.
  In recent years, commercialized innovation of
  national banks also restrict amount of loan to
  small and medium companies. Besides, some small
  companies gave false financial information
  together with a low credit level made the
  conditions worse.

43
External causes for difficulties in financing

• (1)scarce of policies support and faulty of
  correlative laws and regulations
• (2) scarce of credit warrant system
• There are two situations in domestic guarantee
  system, rare of venture funds from credit
  agencies and faulty in risks compensation

44
External causes for difficulties in financing

• (3) loan mortagage
• Loan mortagage determines feasibility of bank
  loan. But small companies can get limited loan
  through loan mortagage because high mortagage
  cost.
• (4)operation in banking system
• Banks provide loans mainly to large state
  owned enterprises when considering safe-guard of
  the loan. The banks of county only maintain
  recommendation of loan and without the loaning
  power.

45
Establish financing policies for small and medium
enterprises

• (1)promote effective policies assisting system
• (2) improve the relationship between bank and
  enterprise
• (3) develop small and medium enterprises
• (4) Improve domestic venture invest market
• (5) Complete credit warrant system for small and
  medium scaled companies
• (6) promote internal assistant among small and
  medium scaled companies

46
Improve domestic venture invest market

• (1) venture invest can help to develop small and
  medium scaled companies
• (2) offer more government policies support
• (3) establish venture invest assistant agency
• (4)improve bond financing market
• (5)develop small and medium board

47
Complete credit warrant system for small and
medium scaled companies

• (1) regulate credit warrant system for small and
  medium
• scaled companies
• (2) regulate the credit agencies
• (3) establish national credit warrant company for
  small
• and medium scaled companies
• (4)complete laws and regulations of credit
  warrant for
• small and medium scaled companies
• (5) improve credit level of small and medium
  scaled
• companies
• (6)emphrase credit warrant reinsurance policy
• (7) consolidate credit management education,
  establish
• society credit culture