Bureaucracy throttles business

PUBLISHED : Friday, 10 January, 1997, 12:00am
UPDATED : Friday, 10 January, 1997, 12:00am

A Chinese entrepreneur complained the other day about how difficult it was to set up a business on the mainland, saying it was much easier to invest in the stock market than in a factory.

It was more the red tape and the unhelpful attitude of some civil servants that he was deploring rather than the market competition.

'You have to have the patience and energy of a cow to deal with the stacks of paperwork, government departments and utility bureaus just to get the permits for getting a factory going,' he said.

What should be a simple process often was transformed into a tedious, tiring and time-consuming experience.

He said it was little wonder that not a small number of Chinese factories diligently looked for loopholes to divert money meant for factory production into stock investments, seeking a windfall.

This is illegal in China. Yet, despite harsh warnings against the practice, some factories continue to risk the ire of authorities.

The entrepreneur may have exaggerated. If, indeed, the bureaucracy is as hostile or impenetrable as he describes, how does one explain the sharp rise in foreign investments flowing into China each year.

Some say the Chinese market potentially is too big to ignore, that multinationals would rather go through the angst and complex process of carving a foothold in China than be left in the cold.

Still, talk to foreign investors and you will see there is some truth in the entrepreneur's complaint about the unfriendly investor operating environment.

Foreign investors are in a slightly better situation.

They are not weighed down by the cradle-to-grave welfare schemes most state enterprises are saddled with. Long cushioned by protectionism, most enterprises are unable to produce goods suitable for the market.

Some deemed to have a strong chance of turning around continue to receive loans to upgrade production.

Since it takes a few years for production upgrading to show results, some enterprises would rather divert the loans into shares in the hope of windfalls to boost bottom lines.

Worse, a few listed companies even use share proceeds from public offers to buy stocks, instead of funding expansion.

Even some banks are reportedly using deposits to buy shares for capital gains to massage earnings.

They face huge interest payments as deposits balloon, but have few good companies to lend to.

Their investment options are few: treasury bonds and the interbank market. Still, these two options do not use up much of their deposits.

Leaving the deposits idle is costly, and so some banks try to invest part of the deposits in stocks - which is against the law.

The China Securities Regulatory Commission has stepped up surveillance of listed companies and banks to prevent funds from flowing illegally into the stock markets.

This could stem the flow of illegal funds in the short term, but whether it works in the long run is questionable.

As a Chinese saying goes: 'For every policy handed down from the top rung, there is a counter-policy from the bottom rung.' By making the foreign investment environment more friendly - through slashing red tape and speeding up approvals - authorities will be able to redirect some funds into factories to upgrade technology and production.