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Speech by DGTI at APEC conference on Powering SMEs (English only)

    Following is the speech by the Director-General of Trade and Industry, Mr Joseph Lai, at the APEC Conference on Powering SMEs this afternoon (July 12) (English only):

Distinguished guests, ladies and gentlemen,        

     Good afternoon.  It is a great pleasure for me to be here this afternoon to speak at this conference on "Powering SMEs".  I am approaching this task not without a fair bit of trepidation.  I am conscious that sitting in front of me is a group of experts, including more than a few who have been working in the financial sector for almost their entire career.  So, as they say, I will try keep to the straight and the narrow.

     Let me start with some facts.  There is no standard definition for SMEs.  But most APEC economies, including Hong Kong, use the number of employees as the criterion for defining SMEs.  According to latest available statistics, throughout APEC, SMEs account for 95% of all enterprises and provides 60% of the private sector employment.  In Hong Kong, we define SMEs as manufacturing firms which employ fewer than 100 people or non-manufacturing firms which employ fewer than 50 persons.  With this definition, there are about 276,000 SMEs in Hong Kong, accounting for 98% of all business establishments and about 50% (1.2 million) of the total private sector employment.  Like other APEC economies, SMEs form an important pillar of Hong Kong's economy.

     However, it has been argued that the economic significance of SMEs is not fully reflected in the balance sheet of our banks.  We often hear complaints from SMEs about the difficulties encountered in securing financing from banks.    

     Traditionally, the typical SMEs in Hong Kong rely on self-financing.  Savings from shareholders and their family members are usually their primary source for raising start-up capital.  Loans from banks come second and are often related to business expansion.  Before the Asian financial turmoil, the booming local property market enabled many SMEs to obtain loans from financial institutions with their properties as collateral; hence the so-called "bricks and mortar" culture.  As the prices of local properties plummeted after the financial turmoil, SMEs had found it hard to secure loans, even with their properties as collateral.

     In 2000, the Government tasked an advisory body, the Small and Medium Enterprises Committee, to study and recommend measures to support SMEs.  On SMEs' access to finance, the Committee reckoned that the "bricks and mortar" culture, which banks and SMEs were both accustomed to, could not be changed overnight.  It would take time for banks to learn about the operation of their customers and to set up an effective support mechanism for assessing the credit risks.  On their part, SMEs needed to do away with their hitherto lack of discipline on financial management, transparency and record keeping.  Following extensive research and consultation, the Committee proposed four SME support schemes.  These were subsequently implemented by the Government in late 2001/early 2002.  One of these is the SME Loan Guarantee Scheme.

SME Loan Guarantee Scheme

     Under the Scheme, the Government acts as guarantor to lending institutions for credit facilities to SMEs.  The maximum guarantee amount for each SME is $4 million.  Of this total, $3 million is for facilities to purchase business installations/equipment and to meet the associated increase in cashflow requirement, whilst $1 million is for Accounts Receivable financing.  

     The essence of the scheme is partnership between the Government and the lending institutions.  The lending institutions are responsible for assessing an SME applicant's credit worthiness; the Government will provide loan guarantee upon request by the lending institutions; and the Government will pay compensation up to 50% of the approved credit facilities in case of default.  The capping of the government's risk-sharing ratio to 50% helps to ensure that the lending institutions will continue to exercise professional prudence in making lending decisions.  There is also a maximum guarantee limit of $1 billion for each participating lending institution.  The scheme offers an opportunity for SMEs to develop sustainable relationship with the lending institutions.  This is particularly useful for SMEs which may not have real estate as collateral or those which are yet to establish a track record with banks.

     Since its introduction in December, 2001, the scheme has been operating smoothly.  Altogether, 42 lending institutions are participating in the scheme.  As at end June, 2007, a total guarantee of $9 billion was issued for some 19,000 loans, involving total credit facilities of $20 billion.  There are more than 9,700 SME beneficiaries, most of them in the businesses of plastics, metal products, printing and publishing as well as trading.  The loan default rate thus far is around 2.5%, which is significantly lower than the assumed default rate of 7.5% under the scheme.    

     In recent years, there were other developments in the local banking sector which are conducive to the development of the SME loan market.  The Commercial Credit Reference Agency was established in October, 2004.  This is a public - private sector collaboration.  The agency collates the credit information of SMEs and makes it available to lending institutions, hence enhancing the credit assessing process of SME financing.  Also, the gradual adoption of the New Basel Capital Accord (commonly known as Basel II) by most banks in Hong Kong, which lowers the capital requirement for SME lending, has facilitated banks in expanding their SME loan portfolio.  With these developments, most banks engaged in SME lending in Hong Kong have reported good growth in this line of business.  There is also a greater variety of products offered to SMEs, such as credit insurance services, currency options and wealth management services.    

     While I will be the first to admit that access to finance still remains a key concern for many SMEs in Hong Kong, I would like to think that our SME Loan Guarantee Scheme does play a useful, positive part in bringing about improvement in SME financing in recent years.  With the current economic rebound, we envisage the demand for SME financing will continue to grow.  In fact, the number of SMEs has been increasing.  When we compare the number of all business establishments in 2005 and 2006, there is an increase of nearly 8,000, almost all of which are SMEs.    

Other Supporting Measures

     Apart from the SME Loan Guarantee Scheme, the Trade and Industry Department also helps SMEs expand overseas markets and enhance their overall competitiveness.

     Hong Kong is an externally-oriented economy.  We encourage SMEs to participate in export marketing activities.  Our SME Export Marketing Fund subsidises SMEs' participation in export promotion activities held locally or outside Hong Kong.  The aggregate maximum amount of grant for each SME is $80,000, with a subsidy ratio of 50% against eligible expenditure items.  As at end June 2007, we have disbursed more than $770 million cash grants to more than 18,000 SMEs.  

     Industrial and trade associations are well placed to help SMEs identify their problems and prepare them for new challenges, but these associations are often handicapped by a lack of means.  With this in mind, our SME Development Fund supports non-profit-distributing organisations to carry out projects which enhance the competitiveness of SMEs.  The maximum amount of funding support for each project is $2 million (or up to 90% of the total project expenditure).  So far, we have approved almost 100 projects, involving a total funding of $110 million.  Some recent examples include projects on compliance with the various "Green" directives imposed by the EU, which affect many SMEs in the manufacturing sectors, and a project proposed by the local accountancy professional association to promote good accounting management among SMEs.  

     The various SME Funding Schemes were introduced in late 2001/early 2002.  Since then, we have injected additional funding to them.  Total government expenditure provision for the Schemes now stands at $2.2 billion.  So far, more than 48,000 SMEs have directly benefited from the schemes through obtaining cash grants or guarantees.

     Apart from the Funding Scheme, the Support and Consultation Centre for SMEs (SUCCESS) under the Trade and Industry Department also provides SMEs with free, reliable and practical business information and consultation services.  Again, many of the programmes of SUCCESS, like the Business Advisory Service (where SMEs receive advice from professionals) and the SME Mentorship Programme (where newly-established SMEs receive counselling from experienced mentors) represent close collaboration with the private sector.

Concluding Remarks

     In Hong Kong and in other APEC economies, there are constant demands for governments to provide more and more assistance to help the SMEs.  Yet, there is also debate on what the governments should, and can, do.  Different governments in the APEC economies have different strategies.  There is no single solution which fits all circumstances.  

     Hong Kong is the world's most renowned free economy.  We believe in the principle of "Market Leads, Government Facilitates".  We believe that, ultimately, it is the SMEs' own efforts which determine their success or otherwise.  In supporting the SMEs, the Government's role is to maintain a favourable business environment, including a simple and clear tax regime with low tax rates, good infrastructure, a versatile and industrious workforce, a culture which encourages the application of technologies, and a robust legal system which protects intellectual properties.  

     While the Government stands ready to assist our SMEs in keeping pace with the evolving business world, the continued competitiveness of the SMEs is also dependent on the support of the business community, including the banking sector.

     Today's conference provides a platform for exchange of ideas on how to empower SMEs.  I am sure there will be useful and interesting discussions on financing the SMEs.  I hope the outcome of today's conference will be fed into the APEC agenda and will contribute positively to the APEC process.  I wish the conference every success.  Thank you!

Ends/Thursday, July 12, 2007
Issued at HKT 16:33


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