State shifts focus to small private firms

PUBLISHED : Wednesday, 06 May, 2009, 12:00am
UPDATED : Wednesday, 06 May, 2009, 12:00am

He Peng, the general manager of privately owned Yuanshan Dairy in Hunan province, wishes the taxman in faraway Beijing would be more sympathetic to his plight.

Despite the world's third-largest economy remaining firmly in the slow lane, small businesses like Yuanshan still face hefty tax bills. That means they are less able to expand and play their part in boosting employment and growth.

The new value-added tax policy enacted at the beginning of this year has to date provided his company with more than 100,000 yuan (HK$113,640) in rebates from machinery and equipment imports.

Yet the company, staffed by only about 20 people, still faces a heavy tax burden - an estimated 700,000 yuan is payable this year. Like other small businesses, Mr He is hoping a planned tax overhaul will provide relief, but he is not holding his breath.

'Local consumers are showing greater preference for our newly developed peanut, soybean and apple milk juices, and we are facing a one-in-a-thousand-years market expansion opportunity,' said Mr He. 'If only I can put off paying the taxes for a while and use it for the expansion in the coming two years.'

Beijing is working on a new support package to boost private-sector investment and help business ride out the slump. The focus will be on private firms, especially small and medium-sized enterprises, which contribute 60 per cent of industrial output and 75 per cent of urban employment.

As well as preferential tax policies, including maybe allowing companies to defer tax payments, the government wants to help firms gain wider market access and bank credit.

Beijing was spurred into action after first-quarter economic data failed to show clearly that the economy was bottoming out, raising fears growing unemployment and income gaps would weaken social harmony.

China's economy slowed to 6.1 per cent in the first quarter from 6.8 per cent in the previous quarter.

The government wants to 'work out policies to encourage the private sector to increase its investment in the economy,' Cao Yushu, a deputy director of the State Council's Office for Western Regions Development, told a Beijing forum.

'This [private-sector aid package] is the key step not only for the 4 trillion yuan stimulus package to deliver the intended effect but also for China's economy to maintain sustainable growth.'

Wang Tongsan, an economist at the Chinese Academy of Social Sciences, a government think-tank, agreed.

'Faced with the current situation, [policymakers] should make further efforts to leverage investment from other channels, especially the private sector,' said Mr Wang, who heads the team that compiles the academy's economic forecast blue books.

Beijing began ramping up investments to fuel growth in the rapidly slowing economy last autumn, culminating in the 4 trillion yuan package unveiled in November.

The pace of month-on-month growth in fixed-asset investment by the state sector grew about 20 per cent to 37.7 per cent between last June and March. But investment growth in the non-state sector declined from 32.49 per cent to 20.29 per cent by February, despite a slight rebound to 22.67 per cent by March.

In the textile industry, a fully competitive sector funded mainly by private investors, fixed-asset investment had actually fallen 19.8 per cent by February from 6.3 per cent growth in June last year.

That shows the private sector is struggling to attract investment, a worrying sign considering its importance to the overall economy. Over the same period, fixed-asset investment growth in the railway and highway sectors hit 210.1 per cent and 35.3 per cent respectively from 20.4 per cent and 2.1 per cent, driven by huge government-directed investment.

'The data is painting a clear picture that private investment is not following the track of fiscal spending, and the expected overall investment warm-up across the economy has basically failed to materialise,' Citigroup economist Ken Peng said.

The mainland's fiscal income began to drop in October last year, with the central government leading the slump. For the first quarter, fiscal income shrank 8.3 per cent year on year, but fiscal expenditure rose 34.8 per cent, signalling fiscal weakening.

Over the first three months of this year, new loans extended by mainland banks rose to 4.58 trillion yuan, already 91.6 per cent of the 5 trillion yuan full-year target.

Despite the money being pumped into the economy, policymakers are closely observing whether the stimulus plan has delivered the expected results.

'We are doing relevant research to evaluate the performance of the 4trillion yuan stimulus package and to see whether any adjustments are necessary,' said an economist at the National Development and Reform Commission who requested anonymity.

The central bank also hinted recently that it would take a more cautious stance in supplying market liquidity. This has been interpreted by some that Beijing is preparing a specific programme to revive private-sector investment.

'The central bank will ... divert total liquidity to grow appropriately and optimise the credit structure in order for the economy to grow stably and faster,' Yi Gang, a deputy central bank governor, said last month.

Premier Wen Jiabao added last month that the government 'will revise the catalogue of projects requiring government approval and work out measures for encouraging private investment as soon as possible.'

Tang Min, the deputy secretary-general of the State Council's China Development Research Foundation, said allowing small and medium-sized enterprises to postpone payment of corporate taxes could be the easiest and most effective way to mitigate firms' current difficulties.

Mr Tang said these small firms should be allowed to put off paying at least 30 to 50 per cent of their annual taxes for two or three years, by which time the economy should have recovered. This would temporarily remove a 1.5 trillion yuan tax burden from small businesses, he said.

'As for the ensuing shortfall in the government's fiscal revenue, it can be replenished by issuing more treasury bonds, which is not a problem given the low fiscal deficit level of the central government,' he said.

Offering subsidies may be another method to induce private investment.

'By offering fiscal subsidies, low-return projects such as those in the agricultural and environmental protection sectors will become profitable for private investors,' Zhang Yonggui, an economist at the Academy of Macroeconomic Research under the NDRC, said.

He also proposed governments grant tax deductions in proportion to the non-state sector's investments.

Still, all the tax breaks and subsidies in the world will not be enough to overcome the structural barriers to the expansion of small and medium enterprises on the mainland. Experts say breaking down market monopolies such as those in oil and telecommunications, energy and banking will yield far more significant benefits for the private sector than government handouts.

An overhauling of the banking system will also be an indispensable component of any private-sector aid package, to facilitate the small firms' capital-raising efforts.

Despite the huge liquidity increase in the past few months, analysts are concerned most of the bank loans have actually flowed into large state-owned or -controlled enterprises via government-backed industrial and infrastructural projects.

'The difficulties in capital raising are a long-running bottleneck for SME growth, which should be dismantled as soon as possible,' said Wang Songqi from the Chinese Academy of Social Sciences.

Mr Wang said banks serving villages and towns, small loan-issuing companies and rural capital co-operatives should be used to channel more funds to smaller firms.

'If private investment was to rise by a great margin, we would be able to sail through the global crisis,' Yao Jingyuan, the chief economist of the National Bureau of Statistics, was quoted as saying by the Shanghai-based Oriental Morning Post.