A much-needed boost for the private economy

PUBLISHED : Monday, 07 September, 2009, 12:00am
UPDATED : Monday, 07 September, 2009, 12:00am

After months of dithering and wrangling, the leadership is to release a new series of measures to boost the private economy within the next few months as its controversial 4 trillion yuan (HK$4.5 trillion) economic stimulus package is losing steam and concerns are mounting.

Details of the measures have been kept under wraps, but state media have begun to drop broad hints, saying the package should contain 20 clauses, some of which are being hailed as policy breakthroughs.

The most significant breakthrough is supposed to allow individuals and businesses meeting certain criteria to engage in lending, a move aimed at legalising the massive underground banking syndicates active in southern regions.

But private businessmen can be forgiven for not holding their breath until they see the fine print and the policies in action - this is not the first time they have been promised goodies that never materialised.

Indeed, back in 2005 and to much fanfare, the State Council released a package of 36 measures to help boost the private economy, but little has come of this, a fitting example of the Chinese idiom 'loud thunder but small raindrops'.

According to state media, the biggest difference between the new and the old packages is the government's promise to allow private firms wider access to financing.

The central government has repeatedly said it needed to do more to help private firms, but the opposite has been happening, best illustrated by another popular saying, that 'the state advances while the private sector retreats'.

This is best illustrated by tracing how Beijing's 4 trillion yuan economic stimulus package and a record 7.73 trillion yuan in bank loans have been disbursed. The bulk has gone towards infrastructure projects, including bridges and railways, and the 10 selected major industries, including auto, steel, textiles and electronics, which are heavily tilted towards the state-owned sector. The money did indeed provide a short-term boost to the economy, which grew 7.9 per cent in the second quarter from a year earlier, rebounding from 6.1 per cent in the first three months - the weakest pace in almost a decade.

But concerns about a jobless economic recovery are mounting. Leaders have recently admitted the stimulus effort was losing steam and warned about excess industrial capacity due to overinvestment. The worries are justified. The focus on infrastructure spending is unlikely to create enough jobs long term, while the bulk of bank lending went to state-owned firms, which are no longer the main creators of jobs.

The state firms, flush with cash, have gone on a spending spree, investing in everything from land to resources, which has caused resentment at home and abroad.

Some analysts suspect state firms are the ones guilty of breaching regulations and channelling bank loans into the stock market for speculation, driving the market into a frenzy earlier this year.

Against such a background, there are good reasons to believe the government may be more serious this time about helping out small and medium-sized enterprises, most of which are privately owned, not least because they are the biggest source of employment.

Beijing's short-term options are running out and focusing on the SMEs is the sole proper way to bring about balanced and sustainable economic growth. Private firms are the key to help rebalance the economy by boosting domestic consumption.

According to an investigative report published by the People's Daily last week, SMEs still faced great difficulties securing bank loans despite the huge sums in the financial system.

For instance, there were about 130,000 SMEs in the industrial city of Wuhan , Hubei province, it reported, with their contributions accounting for 47 per cent of the city's gross domestic product, but only about 10 per cent could get bank loans this year.

But access to bank loans is just one of the barriers that need to come down. Another one is allowing private firms to expand into areas dominated by state firms - basic industries, infrastructure, banking and insurance, education, culture, medical care and public services.

The central government has made noises about levelling the playing field for years so let's hope it means what it says this time.