The private sector now produces the bulk of national output, but has limited access to low cost finance through the dominantly state-owned banking sector.
Sustaining growth and recovery over the long haul continues to require unshackling the market economy and opening opportunity for private firms to compete of the same terms and in the same sectors as privileged state-owned enterprises (see an earlier piece by Yu Yongding).A great deal hangs on whether policymakers understand this and the importance of maintaining the momentum of reform that has entrenched the capacity of the market to deliver China’s remarkable record of economic growth.
This week’s special report from EAF reveals initiatives from the Chinese policy makers that provide a harbinger of hope that policy makers are confronting China’s moment of truth on the importance of getting the market fixed — or at least getting rid of some of the distortions that have returned to burden its performance and efficiency.
Last month, the Chinese State Council released a new set of guidelines on domestic private investment. Its 36 measures mirror a similar policy review published 5 years’ ago on the non-state economic sector which promoted equal treatment of both state and private sectors. The measures are aimed at lowering the entry barriers for private investors in sectors such as infrastructure, municipal services, financial services, logistics and defence which have all traditionally been dominated by state-owned giants or excluded from private sector participation altogether. Private investors have been starved of vital credit from a state-controlled banking sector. The few legitimate private banks that largely service the private sector provide a small window of access to the formal credit market. State-owned enterprises were the main direct beneficiaries of Beijing’s massive fiscal expansion and stimulus package while the private sector was left to scrape around the bottom of the barrel.
Private firms are more effective in using resources than their state-owned counterparts. This is a widely acknowledged fact in China. A Chinese Academy of Social Sciences study shows that, between 2004 and 2008, private firms were on average 1.6 times more profitable than state-owned firms. If the resources allocated to the state instead mobilised through private firms, the Chinese government would earn an extra 2 trillion yuan (US$ 292 billion) in tax revenue and profit.
Hopefully the new policy will not fall victim to the same fate as its predecessor: a reform plan that was suffocated by bureaucratic red tape and nepotism for state enterprises. It is a litmus test for Beijing’s reform credentials on unshackling China’s private sector engine of growth.
As our report this week says, hopefully this policy initiative to even up the playing field for the private sector and strengthen role of the market in the Chinese economy will not fall victim to the same fate as its predecessor: a reform plan that was suffocated by bureaucratic red tape and nepotism surrounding state-owned enterprises.
It is a litmus test for Beijing’s reform credentials on unshackling China’s private sector engine of growth. It is also crucial to rebalancing growth in China and alleviating many problems in the relationship between the Chinese economy and its partners globally.