Small and medium enterprises financing in China Walter Garcia–Fontes Universitat Pompeu Fabra SUMMARY November 2005 Introduction After the start of an open-door policy in 1978 moving towards a more market-oriented economy, China has experienced a decline in state-owned enterprises and an important expansion for small businesses. The role of small and medium enterprises (SMEs) in economic development is well documented for advanced economies and have been crucial in China’s process of economic reform. It has been pivotal in China’s impressive economic growth during the last decades. Nevertheless, some bottlenecks and obstacles appear for further growth of SMEs, especially with respect to financing. In this paper we describe the situation of SMEs in China and the main issues concerning the financing of SMEs. SMEs have been part of China’s impressive economic growth of the last decades and the main actors in the privatization process. There is evidence, though, that further development is constrained by different factors, one of which is access to finance. 1 The development of SMEs in China According to the World Bank Investment Climate Survey for China, SMEs in China face important credit constraints, and have limited access to private finance compared to other Asian countries included in the survey 1 . The survey also shows that the use of formal finance declines with firm 1 According to the survey, SMEs in China obtain only 12 percent of their working capital from bank loans, while SMEs obtain 21 percent in Malaysia, 24 percent in Indonesia, 28 percent in the Philippines and 26 1