The State Council meeting yesterday decided that the government would take nine measures to support the development of small and micro firms. Of these measures, three of them are likely to be considered as important. These are:

1) A reduction in the risk weighting for small and micro firms. Although it is not stated clearly in the press release, our bank analyst believes this refers to the planned reduction of risk weighting from 100% to 75%, which has been discussed in the press and already included in analyst models in the past few weeks. Therefore it is not new news. As for impact on actual lending to small and micro firms, some banks may become more aggressive due to reduced capital cost, but other banks may remain conservative as the increase in lending to small and micro firms implies higher credit costs over the medium term. In addition, as long as the overall credit quota is not relaxed (no sign of that yet given that CPI inflation is stilling running at around 6% in September), an increase in lending to smaller firms implies a reduction in lending to larger and medium firms, and the large and medium firms will likely continue to delay their payments to smaller firms. According to our bank analysts, the deferral of payments by larger companies to smaller ones due to the overall tight monetary environment was the most important cause of small business funding stress.

2) An increase in small and micro firms' exemption thresholds for VAT and business tax. In 2002, these exemption thresholds for small and medium enterprises were raised. For example, for those mirco firms paying the business tax on a daily basis, the exemption threshold for daily revenue was raised to RMB100 from RMB50. There are not yet details as to how much the exemption thresholds will be increased this time. Assuming, in the same example, the threshold is further increased to RMB200/day from the previous RMB100/day, and given the 5% business tax rate for services, it implies a reduction in tax liability of RMB150 per month (RMB5 per day) for such micro firms. This is helpful but modest.

3) Extending to 2015 the 50% reduction in the corporate income tax for small and micro firms that earn minimum profits. This policy was announced in late 2009 and was previously scheduled to expire by the end of this year. Under this policy, small and micro firms with annual profit below RMB30,000 are allowed to reduce their taxable income by 50% (and apply the tax rate of 20%). For a micro company with annual profit of RMB20000, the policy reduced its income tax by RMB2000 per year (in 2010 compared with 2009). However, as yesterday's State Council decision is only an extension of the existing policy, it only helps avoid an increase in taxation (rather than offering a reduction from here) on small and micro firms.

Overall, our assessment is that these measures will provide some modest support for small and micro firms, but they will unlikely lead to a significant improvement in the operating environment for these companies as the overall macro policy stance remains tight.

• [Editor:editor]