Voice in Legco
Voice in Legco - Avoid Impractical Measures to Save Economy and SMEs

To truly solve the imminent needs of SMEs, the Government, lending institutions and HKMC must strengthen communication among themselves to seek consensus as soon as possible in order to mitigate the SFGS restrictions on applications and claims properly.


Economic winter in early summer

With the increasing risk of global economic downturn, in April, the International Monetary Fund (“IMF”), cut its growth outlook for the global economy to 3.2%, from its projection of 3.4% issued in January. The downward revision is the fourth straight cut in the last 12 months. Besides, the World Bank reduced its 2016 global growth forecast to 2.9%, from the 3.3% projection in June last year. As a relatively small export-oriented economy, Hong Kong has not only suffered from decrease in goods exports, but also has responded by sharp and corresponding decline of tourism and retail markets. Although it is still early summer, the business community has already encountered an economic winter. As the backbone of our economy, the small and medium-sized enterprises (“SMEs”) are bearing the brunt, with business confidence and hiring sentiment dealt a heavy blow.


Regarding to the Standard Chartered Hong Kong SME Leading Business Index Report (2016 Q2) published by the Hong Kong Productivity Council (“HKPC”) recently, the Overall Index dropped to its lowest in three years, and the Sub-Index for “Staff Number” went below the 50 no-change mark for the first time, reflecting that SMEs may freeze hiring. It is still remained ambiguous as to when the index will reach the bottom. Around 20% of SMEs might even consider winding up within one year if the sluggish economic situation continues. This means that of the 320,000 SMEs in Hong Kong, 64,000 may close down. Recent statistics for March show that exports from Hong Kong fell 7.0%, notching 11 consecutive months of decline, a new record for the longest continuous decline after the 2008 financial crisis; the total visitor arrivals decreased for the 10th month in a row; and the value of total retail sales in Hong Kong also dropped for 13 consecutive months, hitting the longest decline since 1999 in annualized term of 9.8%. Hong Kong’s unemployment rate published in April edged up 0.1 percentage point to 3.4%. Almost all industries revealed a surge in unemployment rate. The retail industry was hit the hardest, with its unemployment rate up by 0.7 percentage point from the previous period to 5.5%. Faced with these severe business conditions, it is the utmost urgency for the Government to take timely and effective measures to support SMEs and stimulate the economy.


Supportive measures should first focus on liquidity needs

In fact, late last year, in response to the Financial Secretary’s consultation on the Budget, in view of the operational difficulties SMEs may encounter due to the shadow of the outlook for global economic growth, I particularly suggested in my submission to the Secretary to strengthen support for SMEs, includes facilitating the SMEs for their liquidity problems, because cash flow is the key for businesses to survive in the current economic downturn.


It is to be welcomed that the Secretary responded positively by putting forward several specific policy measures in one separate section of the Budget to support SMEs. The first among them are extending the application period for the “special concessionary measures” under the “SME Financing Guarantee Scheme” (“SFGS”), reducing the annual guarantee fee rate, and removing the minimum guarantee fee, which indeed hit the crux of the matter. Nevertheless, it should be noted that there are actually a lot of problems lurking in the current SFGS. If the Government really wants to assist SMEs in coping with cash flow problems as mentioned in the Budget, it must prescribe a right medicine to improve the scheme.


For example, many implementation details in the SFGS are simply contradictory. The Government must clearly understand that SMEs applying for the SFGS are already in cash flow difficulties. If they have sufficient financial resources or proof of asset, they can find banks or lending institutions to finance themselves without the guarantee from the Government. However, the fact is that the Hong Kong Mortgage Corporation Limited (“HKMC”) often refuses to approve loans because of applicants’ cash flow problems, thereby shutting out those SMEs that are in real need of government-guaranteed loans. Moreover, the HKMC is too demanding and takes too much time when dealing with claims made by banks or lending institutions on bad debts, and also often makes things difficult on the ground of “failure to provide adequate documents”. As a result, most banks are reluctant to grant loans, and thus unable to really play a role in helping SMEs.


SFGS has many hurdles

In addition, it is known that banks already have made their own set of stringent criteria for approval of loan applications, which also lead to difficulties for SMEs in loan application under the SFGS. Most banks require the applicant with three consecutive years’ profit in its financial statements and some banks even require the applicant to submit proof of asset as collateral. Consequently, many applications are already rejected even before the stage of bank examination and approval. The reason for banks’ tightening of criteria for SFGS loans may be that it is difficult for them to claim compensation under the scheme. According to the data provided by the authorities, since the launch of the special concessionary measures till the end of February this year, a total of 493 applications had been received from the banks for bad debt claims, of which only 15.2% or 75 cases were eventually approved by the HKMC. The total amount of compensation was only HK$140 million, accounting for only 12.7% of the amount of bad debt claims. It is evident that the banks have little chance of success obtaining compensation for bad debts. Furthermore, as the processing time is very long, i.e. nearly a year on average, the scheme is in effect useless as it is frustratingly out of reach for SMEs in urgent liquidity need.


On the other hand, reducing the annual guarantee fee rate by 10% virtually reduces the deposit SMEs are required to pay. But the crux of the problem is that SMEs are unable to obtain loans. Even if the annual guarantee fee rate is revised to a lower level, it is meaningless to them.


To really solve the urgent needs of SMEs, I believe that the related support measures must not be impractical and have to actually meet industry needs. In this regard, the Government, lending institutions and HKMC must strengthen communication among themselves to seek consensus as soon as possible in order to appropriately relax the SFGS restrictions on applications and claims. Since the economic downturn will continue and hard days may just have begun, for the sake of the welfare of society as a whole, the Government definitely has to provide early assistance to SMEs for them to survive the economic winter in order to save both the economy and employment.


Should you have any comments on the article, please feel free to contact Mr Martin Liao.
Address : Rm 703, Legislative Council Complex, 1 Legislative Council Road, Central, Hong Kong Tel : 2576-7121
Fax : 2798-8802
Email: legco.office.liao@gmail.com