In contemporary China, there are two far-reaching developments that impact directly on graduate employment: (a) a highly entrepreneurial and rapidly growing small business sector and (b) a rapidly expanding higher education sector. Paradoxically, while the small business sector continues to suffer from acute skills shortages, new graduates are still reluctant to seek employment in smaller firms. The attitudes of Chinese graduates are not unusual, and most tend to perceive employment and promotion prospects as significantly better in larger organizations. Competition for jobs in China is increasing and there is growing pressure on new graduates to consider smaller firms as a viable and long-term career option. The authors argue that it is necessary to take a holistic view of graduate employment issues and to facilitate better and closer linkages between small and medium-sized enterprises (SMEs) and higher education institutions. This article highlights the need of the Chinese small business sector for a better qualified and more dynamic graduate labour force to help sustain the momentum of rapid growth experienced in recent years. It highlights specific areas in which the higher education sector could make a significant contribution to the long-term competitiveness of SMEs in China. The scope and direction of further research are identified and discussed.