MA XUEJING/CHINA DAILY

As the novel coronavirus has proven to be highly infectious, quarantine has been the most widely practiced and most effective measure to curb its spread. But this has resulted in a big decline in consumption. Additionally, as the outbreak took place over the Chinese New Year, restaurants, hotels, amusement parks, museums and theaters have been heavily hit during what would have been their peak period, and countless meetings and forums scheduled for February have been postponed.

One silver lining in all this has been the digital economy, which has played a stabilizing role in consumption and the macro economy. With brick and mortar stores not accessible, online commerce has partially compensated.

Take restaurants, for example. During the epidemic, 40 percent of restaurants have worked hard to expand their online take-out business, with half of these restaurants not offering that option before. They were able to do this thanks to a robust infrastructure network that enables online purchase, delivery arrangement and mobile payment. Both online and offline sales have suffered as a result of the epidemic, but the restaurant sector would have been devastated were it not for online business.

A comparison across different industries shows similar results. Amusement parks, museums and theaters have seen a 90 percent decrease in their business, if not more. At the same time, viewership of online movies, TV shows and short videos has experienced exponential growth, while online education has witnessed growth of upwards of 300 percent. As the spring semester has started but students are not yet allowed to go back to school, instructors are taking advantage of livestreaming or recorded online lessons to stay on track.

But with small and medium-sized enterprises being hit hard by the epidemic, it is important to prevent the effects of the outbreak escalating into systemic risks.

According to a survey conducted by Ant Financial, Alibaba's financial arm, over 70 percent of SMEs are struggling. While this number may not be exact, the risks could be systemic if over half of SMEs are struggling to survive.

While SMEs are no stranger to bankruptcy as around one-fifth fail each year under normal circumstances, when half or more SMEs fall on hard times and are at risk of failing at the same time, the economy as a whole will likely suffer. SMEs make up the majority of private enterprises in China and contribute 60 percent of our GDP and 80 percent of urban employment. At the same time, small and medium-sized banks, which have been providing most of the financing for SMEs suffer from poor asset quality. SMEs failing en masse would exert huge pressure on economic growth, employment and financial stability.

It is essential to prevent a vicious cycle of bankruptcy, rising unemployment and more non-performing assets. It is necessary for the government to take the initiative to prevent this cycle from happening. During the 2008 financial crisis, when the US federal government bailed out major financial institutions, the purpose was not to help these entities or their employees and shareholders but to prevent a systemic collapse of the US financial industry. Similarly, if the Chinese government were to take action now, the purpose would not be to save any SMEs in particular but to help the economy, jobs and the financial sector stay afloat.

The key to recovery is to help SMEs stabilize their cash flows. While businesses have reopened across many regions in China, it will take time for consumer confidence and the economy to bounce back. To avoid en masse bankruptcies, job losses and deterioration in financial asset quality, the key is preventing large-scale cash flow disruptions to SMEs. The Ant Financial survey points out that around 80 percent of SMEs are cash-strapped, and 70 percent of businesses say that they will not be able to continue operating if they cannot secure access to financing.

There are three ways to prevent cash flow disruptions: increase revenues, cut operating costs and obtain external financing.

Revenue growth will ultimately come from the recovery of the economy as a whole, and the most effective way to accomplish that is to get the epidemic under control as quickly as possible and restore business activities. The government and the central bank could also consider countercyclical measures, especially subsidizing low-income workers and the jobless, which would help safeguard social stability and also boost demand for the products and services of SMEs boosting revenue.

However, a more important measure is to help SMEs reduce their costs of operation. Over the near term, reducing fees may work better than tax relief, which only works when the businesses are making money in the first place. Recently there have been successful cases of cost reduction for SMEs in different areas, such as allowing a grace period on social security contribution payments, waving or reducing rentals for SMEs that lease State-owned property, waving or reducing utility bills, as well as private enterprise initiatives offering preferential treatment to SMEs.

When it comes to cash flow, past experiences show that companies will dig into their savings before taking out loans after an unexpected downturn. Compared to traditional banks, online banks are more competitive at offering financing options to SMEs, as no in-person contact is required, and risk management can be done even without collateral. Most of the traditional banks decided to close for business during the epidemic, while online banks did not see a decrease in applications for small and microloans. Data from Ant Financial also points to the fact that over half of SMEs have plans to apply for loans from online banks. Hence, the authorities could consider prioritizing these banks and city commercial banks in their support policies.

The author is deputy dean of the National School of Development and director of the Institute of Digital Finance at Peking University. The author contributed this article to China Watch, a think tank powered by China Daily.The views do not necessarily reflect those of China Daily.