21 April 2019
It is the highly flexible and innovative private businesses, rather than the bloated and inefficient SOEs, which can help China defend its economy in a trade battle with the US. Photo: CNSA
It is the highly flexible and innovative private businesses, rather than the bloated and inefficient SOEs, which can help China defend its economy in a trade battle with the US. Photo: CNSA

Why Beijing should ease up on private businesses

The New York Times reported on Sept. 28 that the Chinese government sent a directive to mainland journalists calling for news on six sensitive economic topics to be “managed” properly.

The topics, according to the report, are:

1. Data that fails to meet market expectations and suggests that the economy is slowing.
2. Debt risks of local governments.
3. Negative implications of Sino-US trade frictions.
4. Weakening consumer confidence.
5. Stagflation threat.
6. Difficulties faced by people on account of economic downturn.

Then on the same day, another notice issued by the authorities demanded that all online news outlets remove from their websites any “bearish comments” on the Chinese economy.

It appears the Beijing leaders do have a good grasp of the harsh reality, as the six topics they identified for keeping negative news under control are exactly the same problems that the nation’s economy is facing.

Unfortunately, while the central government is able to diagnose the economic problems precisely, it is avoiding cure.

Amid the grim economic outlook, mainland authorities are resorting to two extreme measures to minimize the negative impact upon the regime: to impose a nationwide gag order on its people and ban all public discussions about the economy.

And the second measure devised by the party is to promote the idea that “the state is advancing whereas the private sector is regressing”, under which there have recently been voices eagerly pitching the notion that it is time for private enterprises to “gradually leave the arena” because they have already accomplished their assigned mission of facilitating the growth of the state-run economy.

Although both President Xi Jinping and Premier Li Keqiang later stepped forward and expressed their support for private businesses, and several official mouthpieces criticized commentators who were pitching such notion, accusing them of unnecessarily setting the public on edge, the truth is that private businesses in China are getting increasingly marginalized in a systematic way.

For example, despite the ongoing economic slowdown, government-owned commercial banks in the mainland are still giving overwhelming priority to state-owned enterprises (SOEs) over private businesses when it comes to providing loans.

In 2016, 78 percent of new business loans approved went to SOEs, while private businesses only got 17 percent.

As private companies were finding it increasingly difficult to get financing from banks and keep their heads above water, many of them had no choice but to sell controlling stakes to cash-flush SOEs.

For instance, so far this year, 22 publicly traded private companies have transferred a significant proportion of their shares to SOEs.

Worse still, while more and more private businesses are getting married to powerful SOEs for financial reasons, the Communist Party is working aggressively to tighten its grip on private enterprises.

According to the statistics provided by several Hong Kong newspapers, since last year a total of 123 listed firms in the mainland have amended their company rules in order to establish Communist Party organs within their corporate structure and entrust them with substantial managing powers.

Apart from SOEs, an increasing number of private enterprises, such as tech giants Tencent and Alibaba, are also jumping on the bandwagon of setting up and then strengthening their own internal Party organs and committees for the sake of political correctness and in an attempt to curry favor with Beijing leaders.

Over the past 40 years of economic reforms, private businesses have contributed at least 50 percent of China’s GDP, 60 percent of the country’s tax revenues, 70 percent of tech innovations and 80 percent of jobs in urban areas.

In comparison, despite having over 70 percent of the country’s resources at their disposal, SOEs in China have only contributed less than 30 percent of the national GDP.

Let’s bear in mind that introduction of the market economy and private enterprises, the separation of business and politics, as well as the revitalization of certain SOEs, have proven instrumental in facilitating the economic miracle of China.

Undoubtedly, it would be the highly flexible and innovative private business sector, rather than the bloated and inefficient SOEs, which can help China win the trade war against the United States and allow Beijing to rise to greater global economic prominence.

As such, what Beijing should do is to stay the course in its economic reforms rather than regress to a state of seclusion.

If China continues to strangle the highly innovative private sector in order to support the “zombie” SOEs like the way it is doing right now, chances are, the achievements the nation made over the last four decades through economic reforms may simply vaporize in the days ahead.

This article appeared in the Hong Kong Economic Journal on Oct 6

Translation by Alan Lee

[Chinese version 中文版]

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Hong Kong Economic Journal contributor

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