Research On The Economic Cycle Of Private Enterprise Financing

As the Central Committee of the Communist Party of China had an in-depthunderstanding of market economy, private enterprises have been attached increasingimportance since China carried out its reform and opening-up policy. Especially since theParty’s15thNational People’s Congress (NPC), non-state-owned economy, with privateenterprises as its major strength, has become important part of China’s whole economy. Itwas proposed at the Party’s18thNPC that they would unwaveringly encourage, supportand guide non-state-owned economic development and speed up the development ofprivate financial institutions. At present,“keqiang economics”, although will cause somepain on the development of private enterprises in the short term, point out the direction oflong-term development for the private enterprise.At present, private businesses are not only the significant component of the nationaleconomy and the most vibrant economic engine, but also social and political issues such asagriculture issues, employment and social stability can’t do without the stabilization anddevelopment of private businesses. However, the financing environment for privatebusinesses doesn’t match their position and function at the present stage, and the financingdifficulties for private enterprises have become the bottleneck to impede their growth.According to related theories of institutional economics, the fundamental objective of anexisting institution is to promote economic growth and development. Adding or innovatingeffective institutions is able to reduce transaction costs in the market and thus to realizePareto improvement. Theoretically, the basic reasons for the financing difficulties toprivate businesses lie in their internal controls and the disequilibrium of supply anddemand in their external financing market. In this regard, under China’s current economicand financial system in which commercial bank credit is the main financing channel toenterprises, the main reason for these difficulties has been the unreasonable institutionalarrangement of commercial bank credit system for state-owned enterprises and privateones. And there are even more significant research values when the above mentionedissues are brought into different phases of business cycles. On the one hand, privatebusinesses are comparatively short of the guidance of national strategic development,blindly expanding in an uprising economy and lacking preparation for the economicdownturn and thus becoming victims and sufferers under national governance of inflation.During economic crisis, credit crisis is likely to occur and it’s hard for private businesses toget financing from financial institutions. On the other hand, as the main funds suppliers,commercial banks, especially state-owned ones, inevitably implement strict lending policyto private enterprises out of consideration for safety and transaction fees, etc. In addition,the impact of continuous international economic crises in recent years, the innatedeficiency of private businesses, the restriction of the lending quota of the central bank andthe restraint of internal audit mechanism have all resulted in a pro-cyclical lending policyof commercial banks to private businesses, with which it’s difficult to meet the need oftheir development.In this paper, we utilize theories of institutional economics to explore the status quo ofthe financing system for China’s private businesses, describe their financing difficultiesand commercial bank lending policies during economic cycles, discuss lots of issues of supply disequilibrium in the course of private businesses’ financing and in the end proposeto solve the problem from the root of the institution and establish a financing system forprivate businesses fit for their development and suitable to Chinese realities as well. Weemphasize the function of commercial banks in this financing system and makesuggestions of measures that government should take at the same time.The main study contents of this paper include four parts. Section one states thebackground of topic selection and its purposes and introduces qualitative and quantitativestudies already done by academics domestic and abroad on the reasons for the financingdifficulties faced by China’s private businesses or small and medium sized enterprises.Section two defines the natures of China’s private enterprises, analyzes their historicaldevelopment, and states their importance in China’s economy, employment and socialstability, especially during different phases of business cycles. Section three elaboratesrelated theories in the west on corporate financing structures. Section four summarizes theoverall history and current situation of private enterprise financing modes and channels,details the main difficulties and problems in the development of private businesses andanalyzes their reasons. Section five introduces the business cycle phases since China’sreform and opening-up and their respective characteristics, makes correlation analysis andtest on the relation between business cycles and private enterprise financing using data ofrelated indicators, and concludes the specific characteristics of bank credit financing forprivate enterprises in business cycles. Section six takes the private enterprises in China’sreal estate industry as an individual sample and analyses their financing issues duringbusiness cycles of this industry, especially issues pertaining to commercial bank loansupport. Section seven introduces financing modes to support private businesses in somedeveloped countries and their experiences, makes empirical test on the relation betweenprivate enterprise financing and business cycles in some developed countries and regions,and on this basis, analyzes the policy effect of finance support for private enterprisesduring business cycles in developed economies and its enlightenments with United Statesas an example. Section eight proposes measures to solve the financing problems inbusiness cycles facing private enterprises and puts forward relevant suggestions oncommercial banks’ financing support for private enterprises.