China's economic reforms will give a boost to the private sector
Words backed by action will make the private sector more competitive with state-owned enterprises
China’s efforts to create a more balanced economy built on sustainable growth are leading to changes that include allowing private investment in new sectors, experimenting with new policies in free-trade zones, easing investment through trade agreements and cutting red tape.
“China has always been protective of what it labels as strategic centres [energy, telecommunications, utilities and finance] in the past”, says Albert Park, director of the Hong Kong University for Science and Technology, for emerging market studies.
Areas that encompassed “natural monopolies [such as electricity distribution] and sensitive industries [such as broadcasting]” were left to be dominated by state-owned enterprises (SOEs), says Daniel Rosen, co-founder of Rhodium Group, a New York-based research partnership and a 20-year China economic analyst.
Such protection served “to cultivate domestic firms as market leaders”, notes Julian Evans-Pritchard, China economist at Capital Economics. At the same time, protected companies often “saw inferior productivity growth relative to international competitors as a result”, Rosen says.
As China shifts towards a more consumer-oriented economy, increased competition leads to changes that affect private domestic and foreign companies as deeply as they impact consumers. “The impetus is greater efficiency, productivity and sustainability, and better management of national fiscal obligations,” Rosen adds.
Some sectors call out for great foreign investment. Because “the majority of hi-tech medical equipment is imported, in order to operate sustainably, greater access to this sector by private capital is needed, if not required”, notes Maria Kotova, a senior associate in the international business advisory department at Dezan Shira and Associates, a specialist foreign direct investment practice.
Reform has come in other ways, as well. “[Premier] Li Keqiang and others are pushing administrative reforms, making it easier to register and to do things without too much red tape,” Park notes. “People feel significant changes are occurring.”